Auditors Responsibility

• Auditor's responsibility


  To design the audit to provide reasonable assurance of detecting material misstatements in the financial statements, whether caused by error, fraud, or noncompliance with laws and regulations
• Error


  Unintentional misstatements in the financial statements, including mathematical or clerical mistakes, incorrect accounting estimates, or mistakes in the application of accounting policies
• Fraud


  Intentional act by one or more individuals involving the use of deception to obtain an unjust or illegal advantage, which can result in material misstatements in the financial statements
• Types of fraud

  • Fraudulent financial reporting
  • Misappropriation of assets
• Fraudulent financial reporting


  Intentional misstatements or omissions of amounts or disclosures in the financial statements to deceive users, often involving manipulation, falsification, or alteration of records
• Misappropriation of assets


  Theft of an entity's assets, often accompanied by false or misleading records to conceal the fact that assets are missing
• Fraud risk factors


  Events or conditions that provide an opportunity, a motive, or a means to commit fraud, or indicate that fraud may have already occurred
• The auditor's responsibility for the detection of fraud and error is essentially the same
• Responsibility of management and those charged with governance


  To establish a control environment and implement internal control policies and procedures to prevent and detect fraud and error
• Auditor's responsibility


  To design the audit to provide reasonable assurance that the financial statements are free from material misstatements, whether caused by error or fraud
• Planning phase


  1. Make inquiries of management about the possibility of misstatements due to fraud and error

  2. Assess the risk of material misstatements due to fraud and error
• Testing phase


  1. Perform procedures to determine whether material misstatements exist

  2. Consider whether misstatements are the result of fraud or error
• Completion phase


  Obtain written representation from management acknowledging responsibility for accounting and internal control systems, disclosing known frauds, and assessing the risk of material misstatement
• Reporting phase

  1. Request management to revise the financial statements if material error or fraud is believed to exist

  2. Qualify or disclaim opinion if unable to evaluate the effect of fraud on the financial statements
• The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting misstatements resulting from error
• The risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud
• Noncompliance with laws and regulations


  Acts of omission or commission by the entity, either intentional or unintentional, that are contrary to prevailing laws or regulations, which may have a material effect on the financial statements
• Responsibility of management

  To ensure the entity's operations are conducted in accordance with laws and regulations
• Auditor's responsibility


  To recognize that noncompliance may materially affect the financial statements, and to design procedures to help identify instances of noncompliance
• Planning phase


  1. Obtain a general understanding of the legal and regulatory framework applicable to the entity

  2. Design procedures to help identify instances of noncompliance
• Auditor's procedures when identifying noncompliance with laws and regulations

  1. Inquire of management as to the laws or regulations that may be expected to have a fundamental effect on the operations of the entity

  2. Discuss with management the policies or procedures adopted for identifying, evaluating and accounting for litigation claims and assessments

  3. Discuss the legal and regulatory framework with auditors of subsidiaries in other countries
• Auditor's procedures to help identify instances of noncompliance with laws and regulations


  1. Reading minutes of meetings

  2. Inquiring of management as to whether the entity is in compliance with such laws and regulation

  3. Inspecting correspondence with the relevant licensing or regulatory authorities
• Auditor's procedures when aware of a possible instance of noncompliance

  1. Obtain an understanding of the nature of the act and the circumstances in which it has occurred

  2. Obtain sufficient other information to evaluate the possible effect on the financial statements

  3. Consider the potential financial consequences

  4. Consider whether the potential financial consequences require disclosure

  5. Consider whether the potential financial consequences are so serious as to call into question the fair presentation given by the financial statements
• Auditor's actions when believes there may be noncompliance

  1. Document the findings

  2. Discuss them with management

  3. Consider the implication on other aspects of the audit
• Auditor's actions at the completion phase

  Obtain written representations that management has disclosed all known actual or possible noncompliance with laws and regulations that could materially affect the financial statements
• Auditor's actions at the reporting phase

  1. Request the management to revise the financial statements if the auditor believes there is noncompliance that materially affects the financial statements

  2. Express a qualified or adverse opinion if management does not revise the financial statements

  3. Express a qualified opinion or a disclaimer of opinion if a scope limitation has precluded the auditor from obtaining sufficient appropriate evidence to evaluate the effect of noncompliance
• An audit is subject to the unavoidable risk that some material misstatements in the financial statements will not be detected, even though the audit is properly planned and performed
• This risk is higher with regard to material misstatements resulting from noncompliance with laws and regulations because noncompliance may involve conduct designed to conceal it, and there are many laws and regulations relating principally to the operating aspects of the entity that typically do not have a material effect on the financial statements and are not captured by the accounting and internal control systems
• Auditors are primarily concerned with noncompliance that may cause the financial statements to contain material misstatements
• Auditors do not normally design audit procedures to detect noncompliance that will not directly affect the fair presentation of the financial statements unless the results of other procedures that were applied cause the auditor to suspect that a material indirect effect noncompliance may have occurred
• The further removed non-compliance is from the financial statements, the less likely the auditor is to become aware of it or to recognize the non-compliance
• Fraud risk factors relating to misstatements resulting from fraudulent financial reporting

  • Management's Characteristics and Influence over the Control Environment
  • Industry Conditions
  • Operating Characteristics and Financial Stability
• Fraud risk factors relating to misstatements resulting from misappropriation of assets


  • Susceptibility of Assets to Misappropriation
  • Controls
• Fraud risk factors relating to Susceptibility of Assets to Misappropriation

  • Large amounts of cash on hand or processed
  • Inventory characteristics, such as small size combined with high value and high demand
  • Easily convertible assets, such as bearer bonds, diamonds or computer chips
  • Fixed asset characteristics, such as small size combined with marketability and lack of ownership identification
• Fraud risk factors relating to Controls

  • Lack of appropriate management oversight
  • Lack of procedures to screen job applicants for positions where employees have access to assets susceptible to misappropriation
  • Inadequate record keeping for assets susceptible to misappropriation
  • Lack of an appropriate segregation of duties or independent checks
  • Lack of an appropriate system of authorization and approval of transactions
  • Poor physical safeguards over cash, investments, inventory or fixed assets
  • Lack of timely and appropriate documentation for transactions
  • Lack of mandatory vacations for employees performing key control functions