Question

In cases of fraud, what is the auditor responsible for? Was the audit firm, Ernst & Young, deficient in its audit?

Answer 1

ISA 240 the Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements recognises that misstatement in the financial statements can arise from either fraud or error. The distinguishing factor is whether the underlying action that resulted in the misstatement was intentional or unintentional.

Following are the Auditor’s responsibilities:

1. Obtain reasonable assurance that the financial statements are free from material misstatements
2. Maintain professional skepticism throughout the audit
3. Should know that Risk of non-detection of management fraud is greater than of employee fraud
4. Must be aware Risk of non-detection of fraudulent material misstatement is higher than the misstatement due to error.

Reporting fraud

a. If the auditor identifies a fraud they should communicate the matter on a timely basis to the appropriate level of management (i.e. those with the primary responsibility for prevention and detection of fraud).

b. If the suspected fraud involves management the auditor shall communicate such matters to those charged with governance. If the auditor has doubts about the integrity of those charged with governance they should seek legal advice regarding an appropriate course of action.

c. Determine if the information about the fraud has to be communicated to a party outside the entity. Here the auditor’s legal responsibility overrides the duty of confidentiality

Documentation

1. Significant decisions taken w.r.t susceptibility of material misstatement in financial due to fraud
2. Identified and assessed risk of material misstatement due to fraud at the financial statements level and at the assertion level
3. Overall responses to the addressed risk mentioned above
4. Audit procedures conclusion including those designed for management override of controls
5. To document communications made about the fraud to the management and others