Auditors’ Responsibilities Regarding Fraud – Do They Have to Report Fraud?

Over the past few years, it can be seen that auditors’ responsibilities towards reporting any possible gaps in the financial statements have increased exponentially.

This is primarily because of the major scandals that have greatly impacted the accounting profession as a result of the fraud.

Therefore, to maintain integrity and confidence in the profession of accounting, it becomes rudimentary for auditors and directors to understand their role in the prevention and detection of fraud.

ISA 240 – Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

In this regard, a lot of governing bodies have set up laws and schemes to prevent such incidents from taking place.

ISA 240 has been specifically designed to reflect the auditor’s responsibilities relating to fraud in an audit of financial statements.

Specifically, this particular standard recognizes that any material misstatement in the financial statements can arise from either fraud or error. The differentiating factor is whether the causal action that subsequently resulted in the misstatement was intentional or unintentional.

Therefore, it can be seen that the main role of the auditor in any audit is to determine if the fraud has actually occurred. It becomes the auditor’s primary responsibility to ensure that he discloses the impact of the fraud on the overall accuracy of the published financial statements.

The external auditor is mainly responsible for obtaining reasonable assurance that the financial statements do not have any signs of material misstatement, regardless of the misstatement being fraud or error.

Given that an auditor is primarily responsible for this specific aspect, it only makes sense to imply that an auditor also has the responsibility to take ownership of his work and provide reasonable assurance that there is no fraud or error involved.

Related article  What Is Audit Adjustment (Adjust Misstatement)? Types and Purposes

Professional Skepticism

Professional skepticism in this regard becomes highly integral for the auditor, without which it will be increasingly challenging to point out any material misstatements from the financial statements.

Professional skepticism basically means that that the auditor recognizes the overall possibility that a material misstatement due to fraud could occur, regardless of the auditor’s prior experience of the client’s integrity and honesty.

ISA 315 – Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment

Another important responsibility of the auditor also stems from ISA 315, which is about Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and Its Environment.

This requires the auditor to evaluate the overall susceptibility of their clients to fraud. The engagement team should also obtain information to identify the risk of fraud when performing risk assessment procedures.

This is another important responsibility of the auditor when it comes to identifying possible fraudulent activities in this case. However, applying all these standards into practice still does not entirely mitigate the overall possibility of a material misstatement failing from being disclosed.

The risk of fraudulent activities, in this case, might be higher than error, primarily because fraudulent activities are often well-planned and well-executed.

Reporting Fraud

If the auditor can identify fraud, he is entitled and responsible for communicating the matter on an urgent basis to the appropriate management level.

However, if the fraud involves the management, the auditor is responsible for reporting to the people charged with governance. Furthermore, the auditor should also consider their responsibility to report the suspicion to a party outside the entity.

Related article  Advantages and Disadvantages of Non-Statutory Audit