FRAUD AND ERROR

FRAUD AND ERROR

Fraud comprises both the use of deception to obtain an unjust or illegal financial advantage and intentional mis-representations affecting the financial statements by one or more individuals among management, employees or third parties.

Fraud is also an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain an unjust or illegal advantage.

Fraud risk factors are events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud.

Error would be unintentional mistakes in financial statements (including the omission of an amount or disclosure).

AUDITORS’ AND MANAGEMENT

AUDITORS’ AND MANAGEMENT

AUDITORS’ RESPONSIBILITY TO FRAUD AND ERROR:

When planning the audit, auditors should assess the risk that fraud or error may cause the financial statements to contain material misstatements. Based on this risk assessment, auditors should design their procedures so that they have a reasonable expectation of detecting material misstatements arising from fraud or error.

MANAGEMENT RESPONSIBILITY TO FRAUD AND ERROR:

Responsibility for the prevention and detection of fraud rests with the management and those charged with governance.

They should create a culture of ethics and honesty within the entity.

This culture should be actively reinforced by active oversight by those charged with governance by:

·         Considering the potential for controls to be over-ridden

·         Considering other inappropriate practices eg aggressive earnings management

NOTE: It is more difficult to detect misstatements arising from fraud rather than from error

AUDIT PROCEDURES

AUDIT PROCEDURES

If offered an audit role, the auditor should:

     

·         ask the client for permission to contact the outgoing auditor (reject role if client refuses)

·         contact the outgoing auditor, asking for any professional reasons why they should not accept appointment (if the client has caused problems, you may wish to say no to the appointment). If a reply is not received, the prospective auditor should always try and contact the outgoing auditor by other means e.g. by telephone or in perso.Even if there are professional reasons or if a reply is still not received, the prospective auditor may still choose to accept but must proceed with care and be  alert to increased risk

·         ensure that the legal requirement in relation to the removal of the previous auditors and the process is complete.

·         carry out checks to ensure the firm can be independent, is competent to do this audit and has the necessary resources

·         assess whether this work is suitably low risk (a sound knowledge of the client will be required in order to make this assessment, see below)

·         assess the integrity of the company’s directors

·         as a commercial organisation, the firm should also ensure that this client is one it wants (e.g. right industry, suitable profit margin available,  etc)

·         not accept the appointment, where it is known in advance a limitation will be placed on the scope of their audit (likewise, if a restriction is imposed during an audit, resignation should be considered). In general, the question of what constitutes a reason for not accepting nomination is one of judgement for the prospective auditor and will primarily depend on the level of risk willing to be accepted.