ISA 240 (Redrafted) - Auditors and Fraud _ ACCA Qualification _ Students _ ACCA Global

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<ul><li><p>3/3/2015 ISA240(Redrafted)AuditorsandFraud|ACCAQualification|Students|ACCAGlobal</p><p>http://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/f8/technicalarticles/isa240.html 1/3</p><p>Home &gt; Students &gt; ACCAQualificationStudentJourney &gt; Qualificationresources &gt; ACCAQualification &gt; F8AuditandAssurance &gt; Technicalarticles</p><p>ISA 240 (REDRAFTED) - AUDITORS AND FRAUD</p><p>RELATED LINKS</p><p>StudentAccountanthubpage</p><p>RELEVANTTOACCAQUALIFICATIONPAPERSF8andP7</p><p>ThisarticleexaminesthedefinitionsgivenbyInternationalStandardonAuditing(ISA)240(Redrafted)offraudanderror,andthehistoricalexpectationsoftheauditrole.Italsodefinestheextentofauditorresponsibilitiesforthepreventionanddetectionoffraud,includingtheneedforprofessionalscepticismanddiscussionamongtheengagementteam.ThearticlethensummarisesthekeyriskassessmentproceduresrequiredofauditorsbyISA240(Redrafted),andconcludesthatthetraditionalwatchdognotbloodhoundphilosophyregardingtheextentofauditorresponsibilitiesforfrauddetectionisnolongervalidinthecontextoftherequirementsoftheredraftedISA.</p><p>Fraudisahighlycontroversialarea,andtheextentofauditorresponsibilityforthepreventionanddetectionoffraudhasgeneratedconsiderablediscussioninrecentyears.Thisarticleaimstosummarisethecurrentextentofauditorresponsibilitiesforfraud,aspertherequirementsofISA240(Redrafted),TheAuditorsResponsibilitiesRelatingtoFraudinanAuditofFinancialStatements.ISA240(Redrafted)wasissuedinDecember2006andiseffectiveforauditsoffinancialstatementsforperiodsbeginningonorafter15December2008.TheInternationalAuditingandAssuranceStandardsBoard(IAASB)ClarityProjectwaslaunchedin2004inordertoencouragegreateruseofitsstandardsandtofacilitatetheprocessoftranslationofstandardsintootherlanguages.ISA240isdescribedbytheIAASBHandbook(reference1)asredraftedbecauseithasbeenrevisedinthepastfewyearsandisnotinneedoffurtherrevisionbytheClarityProject.Asaresult,theclarifiedversionofISA240isthesameastheredraftedversion.SeetheIAASBHandbook,andthesectionBackgroundInformationontheClarityProjectoftheIAASBforfurtherdetails(reference2).</p><p>BACKGROUND</p><p>ThetraditionalpassivephilosophytowardsauditorresponsibilityforfrauddetectioniswellsummarisedbytheLordJusticeLopesruling,intheUK,giveninthe1896KingstonCottonMillcase(reKingstonCottonMillCompany(No.2)):Anauditorisnotboundtobeadetective,ortoapproachhisworkwithsuspicion,orwithaforegoneconclusionthatthereissomethingwrong.Heisawatchdog,notabloodhound.(Reference3).WatchdogsandBloodhounds(below)givesformaldefinitionsofawatchdogandabloodhound.</p><p>Clearly,auditinghaschangedconsiderablysince1896,althoughauditorresponsibilityforfrauddetectionhasremainedalowpriority.Wenowconsidertherequirementsoftherecentlyrevisedauditstandardregardingtheroleoftheauditorandfrauddetection,andthenformaconclusionaboutthecurrentextentofauditorresponsibilityforfrauddetection.</p><p>THEDIFFERENCEBETWEENFRAUDANDERROR</p><p>Thekeydistinguishingfactorbetweenfraudanderroriswhethertheunderlyingactionthatresultsinamisstatementofthefinancialstatementsisintentionalorunintentional.Thetermfraudisabroadlegalconcept,buttheauditorisconcernedwithfraudthatcausesamaterialmisstatementinthefinancialstatements.ISA240(Redrafted)definesfraudas:Anintentionalactbyoneormoreindividualsamongmanagement,thosechargedwithgovernance,employees,orthirdparties,involvingtheuseofdeceptiontoobtainanunjustorillegaladvantage.ISA240(Redrafted),paragraph11.</p><p>Thetwotypesoffraudmostrelevanttotheauditor,accordingtoISA240(Redrafted),aremisstatementsarisingfromfraudulentfinancialreporting,andmisstatementsarisingfromthemisappropriationofassets.Bywayofcontrasttofraud,thetermerrorreferstoanunintentionalmisstatementinfinancialstatements,includingtheomissionofanamountoradisclosure.ISA240(Redrafted)says:Thedistinguishingfactorbetweenfraudanderroriswhethertheunderlyingactionthatresultsinthemisstatementofthefinancialstatementsisintentionalorunintentional.ISA240(Redrafted),paragraph2.</p><p>MYACCA HOME WORKFORUS TECHNICALACTIVITIES HELP&amp;SUPPORT GLOBALSITE</p></li><li><p>3/3/2015 ISA240(Redrafted)AuditorsandFraud|ACCAQualification|Students|ACCAGlobal</p><p>http://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/f8/technicalarticles/isa240.html 2/3</p><p>Theemphasisofthisarticleisonfraud,becausefraudresponsibilitiesaremorecontroversialthanerror.Fraudmayinvolvesophisticatedandcarefullyorganisedschemes,designedtoconcealfraudulentactivity,suchasforgery,deliberatefailuretorecordtransactions,orintentionalmisrepresentationsbeingmadetotheauditor.However,inordertobetterunderstanderror,moreconsiderationofinternalcontroleffectivenessisrequired.</p><p>ISA240(REDRAFTED)ANDRESPONSIBILITIESFORFRAUD</p><p>ISA240(Redrafted)makesitclearwhohasthemainresponsibilityforthepreventionanddetectionoffraud:Theprimaryresponsibilityforthepreventionanddetectionoffraudrestswithboththosechargedwithgovernanceoftheentityandmanagement.ISA240(Redrafted)paragraph4.</p><p>ISA240(Redrafted)alsogoesontostate,however,that:AnauditorconductinganauditinaccordancewithISAsisresponsibleforobtainingreasonableassurancethatthefinancialstatementsasawholearefreefrommaterialmisstatement,whethercausedbyfraudorerror.ISA240(Redrafted),paragraph5.</p><p>Hence,boththeentityitselfandtheauditorshaveresponsibilitiesforfraudanderror.Itcouldbesaidthatmanagement,andthosechargedwithgovernance,havetheprimaryresponsibilityforfraudanderror,whereastheauditorhasasecondaryresponsibility.Itisimportant,however,toensurethattheextentofthesesecondaryresponsibilitiesareclearlyunderstood,whichistheareadiscussedintherestofthisarticle.</p><p>PROFESSIONALSCEPTICISM</p><p>ISA200(RevisedandRedrafted),OverallObjectiveoftheIndependentAuditorandtheConductofanAuditinAccordancewithISAs,requirestheauditortomaintainanattitudeofprofessionalskepticism:Theauditorshallplanandperformanauditwithprofessionalskepticism,recognisingthatcircumstancesmayexistthatcausethefinancialstatementstobemateriallymisstated.ISA200(RevisedandRedrafted),paragraph15.</p><p>ISA200(RevisedandRedrafted)describesprofessionalskepticismas:Anattitudethatincludesaquestioningmind,beingalerttoconditionswhichmayindicatepossiblemisstatementduetoerrororfraud,andacriticalassessmentofauditevidence.ISA200(RevisedandRedrafted),paragraph13(l).</p><p>ISA240(Redrafted)furtherrequiresthat:Theauditorisresponsibleformaintaininganattitudeofprofessionalskepticismthroughouttheaudit.ISA240(Redrafted),paragraph8.</p><p>Professionalskepticismisofkeyimportancetotheaudit,forexamplerequiringauditorstobealertto:</p><p>auditevidencecontradictingotherevidenceinformationquestioningevidencereliabilityconditionsthatmayindicatepossiblefraudcircumstancesthatsuggesttheneedforauditproceduresinadditiontothoserequiredbytheISAs.</p><p>DISCUSSIONAMONGTHEENGAGEMENTTEAM</p><p>ISA240(Redrafted)referstotherequirementinISA315(Redrafted),IdentifyingandAssessingtheRisksofMaterialMisstatementThroughUnderstandingtheEntityanditsEnvironment,thatmembersoftheengagementteamdiscussthesusceptibilityoftheentitysfinancialstatementstomaterialmisstatementduetofraud.ISA240(Redrafted)requiresthat:Thisdiscussionshallplaceparticularemphasisonhowandwheretheentitysfinancialstatementsmaybesusceptibletomaterialmisstatementduetofraud,includinghowfraudmightoccur.ISA240(Redrafted),paragraph15.</p><p>Ordinarily,thekeymembersoftheengagementteamshouldbeinvolvedinthediscussion,andtheengagementpartnershouldthenconsiderwhichmattersaretobecommunicatedtothoseintheteamnotinvolvedinthediscussion.Discussionisexpectedtooccurwithaquestioningmind,settingasideanybeliefsheldbytheengagementteammembersthatthemanagementandthosechargedwithgovernancearehonestandhaveintegrity.Interestingly,thisdiscussionisalsoexpectedtoincludeaconsiderationofhowanelementofunpredictabilitywillbeincorporatedintothenature,timing,andextentoftheauditprocedurestobeperformed.</p><p>ISA240(REDRAFTED)RISKASSESSMENTPROCEDURES</p><p>ISA240(Redrafted)requiresthattheauditorperformsriskassessmentprocedurestoobtaininformationforuseinidentifyingtherisksofmaterialmisstatementduetofraud.Paragraphs17to24ofISA240(Redrafted)outlinetherequiredriskassessmentprocedures,whicharesummarisedintheRiskAssessmentProceduresboxbelow.</p><p>CONCLUSION</p><p>TheredraftingofISA240hasallowedforatimelyreviewofauditresponsibilitiesrelatingtofraud.It</p></li><li><p>3/3/2015 ISA240(Redrafted)AuditorsandFraud|ACCAQualification|Students|ACCAGlobal</p><p>http://www.accaglobal.com/gb/en/student/accaqualstudentjourney/qualresource/accaqualification/f8/technicalarticles/isa240.html 3/3</p><p>Lastupdated:22Sep2014</p><p>shouldbenoted,however,thatthereareminordifferencesofemphasisbetweentherequirementsofISA240(Redrafted)andthecurrentrequirementsofISA(UKandIreland)240TheAuditorsResponsibilitytoConsiderFraudinanAuditofFinancialStatements,whichbecameeffectiveforperiodscommencingonorafter15December2004.AccordingtoISA240(Redrafted)thedifferencebetweenfraudanderrordependsuponwhetherdeceptionhasbeenused,andthedistinctionbetweentheresponsibilitiesofthosechargedwithgovernanceandauditorsforfraudpreventioncanbedescribedrespectivelyasprimaryandsecondaryresponsibilities.Auditorsarerequired,however,tomaintainanattitudeofprofessionalskepticismthroughouttheaudit,andmembersoftheauditengagementteamarerequiredtodiscussthesusceptibilityoftheentitysfinancialstatementstomaterialmisstatementduetofraud.</p><p>ISA240(Redrafted)requiresauditorstoperformriskassessmentprocedurestoobtaininformationforuseinidentifyingtherisksofmaterialmisstatementduetofraud.</p><p>Finally,itcanbeconcludedthattodescribetheauditroleasthatofawatchdog,notabloodhoundisnolongervalidinthecontextoftherequirementsoftheredraftedandrevisedISAsthesenegatethetraditionalpassivephilosophytowardsauditorresponsibilityforfrauddetection,markingasignificantshiftawayfromamonitoringroleandtowardstherequirementforaverykeensenseofsmell.</p><p>WrittenbyaPaperF8exampanelmember</p><p>REFERENCES</p><p>1. HandbookofInternationalAuditing,Assurance,andEthicsPronouncements,PartII,IAASB,2008Edition.2. BackgroundInformationontheClarityProjectoftheInternationalAuditingandAssuranceStandardBoard,2008</p><p>Edition,pages1to4,inPartIIofHandbookofInternationalAuditing,Assurance,andEthicsPronouncements,IAASB,2008Edition.</p><p>3. LordJusticeLopes,TheLawTimes,VolumeLXXIV,CourtofAppeal,11July1896,quotedinSarupD,WatchdogorBloodhound?ThePushandPullTowardsaNewAuditModel,InformationSystemsControlJournal,Volume1,2004.</p><p>4.OxfordEnglishDictionary,www.askoxford.com</p><p>SHARE THIS PAGE</p></li></ul>