Consideration of fraud in a financial statement audit

By Carol Kirwan
MACPA Director of Technical Services & Regulatory Affairs

There seems to be a great deal of confusion as to an auditor's responsibility for the detection of fraud in the audit of financial statements.

The AICPA's Auditing Standards Board has issued an exposure draft that establishes standards and provides guidance to auditors in fulfilling their responsibility as it relates to fraud. This proposed Statement on Auditing Standards (SAS) does not change an auditor's responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud (as described in AU sec. 110.01).

The following is an excerpt from the summary of the proposed statement:

Description and characteristics of fraud — describes fraud and its characteristics, including the aspects of fraud particularly relevant to an audit of financial statements.
Discussion among engagement personnel regarding the risks of material misstatement due to fraud — requires, as part of planning the audit, that there be a discussion among the audit team members to consider the susceptibility of the entity to material misstatement due to fraud and to reinforce the importance of adopting an appropriate mindset of professional skepticism.
Obtaining the information needed to identify the risks of material misstatement due to fraud — requires the auditor to gather the information necessary to identify the risks of material misstatement due to fraud, by the following:

Making inquiries of management and others within the entity.
Considering the results of the analytical procedures performed in planning the audit. (The proposed statement also requires that the auditor perform analytical procedures relating to revenue.)
Considering fraud risk factors.
Considering certain other information.

Identifying risks that may result in a material misstatement due to fraud — requires the auditor to use the information gathered above to identify risks that may result in a material misstatement due to fraud.
Assessing the identified risks after taking into account an evaluation of the entity's programs and controls — requires the auditor to evaluate the entity's programs and controls that address the identified risks of material misstatement due to fraud, and to assess the risks taking into account this evaluation.
Responding to the results of the assessment — requires the auditor to respond to the results of the risk assessment. This response may include the following:

A response to identified risks that has an overall effect on how the audit is conducted — that is, a response involving more general considerations apart from the specific procedures otherwise planned.
A response to identified risks that involves the nature, timing and extent of the auditing procedures to be performed.
A response involving the performance of certain procedures to further address the risk of material misstatement due to fraud involving management override of controls.

Evaluating audit test results — requires the auditor's assessment of the risk of material misstatement due to fraud to be ongoing throughout the audit and that the auditor evaluate at the completion of the audit whether the accumulated results of auditing procedures and other observations affect the assessment. It also requires the auditor to consider whether identified misstatements may be indicative of fraud and, if so, directs the auditor to evaluate their implications.
Communicating about fraud to management, the audit committee, and others — provides guidance regarding the auditor's communications about fraud to management, the audit committee, and others.Documenting the auditor's consideration of fraud — describes related documentation requirements.

The exposure draft also includes Appendix B, "A Proposed Amendment to SAS No. 1, Codification of Auditing Standards and Procedures (AICPA, Professional Standards, Vol. 1, AU section 230, 'Due Professional Care in the Performance of Work.')."

Comments on the exposure draft should be sent to Sherry Boothe, Audit and Attest Standards, File 2691, American Institute of Certified Public Accountants, 1211 Avenue of the Americas, New York, NY 10036-8775, in time to be received by May 31, 2002. Responses also may be sent by e-mail to SBOOTHE@AICPA.org.

Written comments on this exposure draft will become part of the public record of the AICPA and will be available for public inspection at the AICPA's offices after June 30, 2002, for one year.

This content has not yet been Rated.

To Rate content, please Login.