Question

1. Why aren't auditors responsible to detect fraud in many cases? Should they be? Why or why not?

Answer 1

Fraud : An intentional act by one or more individuals among management, TCWG, employees, third parties, involving the use of deception to obtain an unjust or illegal advantage.

The primary responsibility for the prevention and detection of fraud rests with both, those charged with governance of management & entity. Auditor is responsible for obtaining reasonable assurance that the financial statements taken or presented to him as a whole are free from material misstatements. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed in accordance with the standards set.

The Auditors should exercise professional skepticism during audit. they should perform their audit applying all knowledge they possess and also with an independent mindset. The auditor shall be liable only if inadequacies resulted from their side during performance of their audit which resulted in failure to detect fraud. The Auditors do not prepare the financials.. they prepare them, audit them from the books of accounts presented before them by the management and personnel.

Primarily, whether an auditor is responsible for fraud or not will depend on the fact that whether failure to detect fraud was due to shortcomings in auditor's work.

An auditor is just responsible to form an opinion that whether the financial statements as a whole are free from material misstatements whether due to fraud or error. He/she exercises all the standards set in performing such an audit. He provides a reasonable assurance & not an absolute level of assurance. The assurance provided by the auditor does not guarantee for future of an Enterprise though.. It only states that as at a particular date, the financials provided by management are free from material misstatements subject to inherent limitations of an audit. The fraud detected later will be the responsibility of an auditor only if there are possibilities, circumstances that the fraud could have been identified by the auditor's procedures adopted.