THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS ISA

THE AUDITOR’S RESPONSIBILITIES RELATING TO

FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

ISA 240 158

Responsibilities of the Auditor

5. An auditor conducting an audit in accordance with ISAs is responsible for

obtaining reasonable assurance that the financial statements taken as a whole are

free from material misstatement, whether caused by fraud or error. 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 ISAs.3

6. As described in ISA 200,4 the potential effects of inherent limitations are

particularly significant in the case of misstatement resulting from fraud. The

risk of not detecting a material misstatement resulting from fraud is higher than

the risk of not detecting one resulting from error. This is because fraud may

involve sophisticated and carefully organized schemes designed to conceal it,

such as forgery, deliberate failure to record transactions, or intentional

misrepresentations being made to the auditor. Such attempts at concealment

may be even more difficult to detect when accompanied by collusion.

Collusion may cause the auditor to believe that audit evidence is persuasive

when it is, in fact, false. The auditor’s ability to detect a fraud depends on

factors such as the skillfulness of the perpetrator, the frequency and extent of

manipulation, the degree of collusion involved, the relative size of individual

amounts manipulated, and the seniority of those individuals involved. While

the auditor may be able to identify potential opportunities for fraud to be

perpetrated, it is difficult for the auditor to determine whether misstatements in

judgment areas such as accounting estimates are caused by fraud or error.

7. Furthermore, the risk of the auditor not detecting a material misstatement

resulting from management fraud is greater than for employee fraud, because

management is frequently in a position to directly or indirectly manipulate

accounting records, present fraudulent financial information or override control

procedures designed to prevent similar frauds by other employees.

8. When obtaining reasonable assurance, the auditor is responsible for

maintaining professional skepticism throughout the audit, considering the

potential for management override of controls and recognizing the fact that

audit procedures that are effective for detecting error may not be effective in

detecting fraud. The requirements in this ISA are designed to assist the auditor

in identifying and assessing the risks of material misstatement due to fraud and

in designing procedures to detect such misstatement.

3 ISA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance

with International Standards on Auditing,” paragraph A51.

4 ISA 200, paragraph A51.