Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

In the context of ISA 240 (The Auditor‘s Responsibility to Consider Fraud and Error in, an Audit of Financial Statements):

(a) Define: –
(i) Fraud (3 marks)
(ii) Error (3 marks)

(b) Outline the respective responsibilities of an entity‘s management and the external
auditor with respect to the prevention and detection of fraud and error. (8 marks)

(c) Outline the procedures an external auditor should follow if he suspects that fraud; or error have been perpetrated. (6 marks)
(Total: 20 marks)
ANSWER
(i) Fraud
This term is used to refer to irregularities involving the use of criminal deception to obtain unjust or illegal advantage. For instance misappropriation of stock the store-keeper, followed altering of records.

(ii) Error
This refers to an oversight a staff in the recording of a transaction, for instance an accountant, wherean incorrect value for money is entered in the books unintentionally. In this case the intention of obtaining illegal advantage may not be the cause of such an oversight.

(b)

– The primary responsibility for prevention and detection of errors and irregularities rests with management
– This responsibility arises out of a contractual duty of care directors and managers and also because directors and other managers act as stewards with regard to property entrusted to them the shareholders.
– This duty may be discharged them instituting and maintaining a strong system of internal controls.
– The auditor is not required to assist the directors in the task the draft guideline does suggest that an auditor should remind the directors of their responsibility through an engagement letter or other means, and the need to have a system of internal controls as a deterrent to errors and irregularities.
– In regard to errors and irregularities, the auditor should have sufficient, relevant and reliable audit evidence to support his opinion or to conclude that no material errors and irregularities have occurred or if they have occurred, then they have either been corrected or properly disclosed in the financial statements.

(c)

• Consider materiality. If the matter could not be material in the context of the accounts then take no further action, but if material, appropriate action must be taken. Again if he matter is material, perform appropriate additional tests.
• If it appears that irregularities have occurred and may be material, then consider the effects on the financial statements and ensure that these have been prepared with such adjustments and amendments as may be required.
• If further investigation is required and the accounts cannot be delayed, then the auditor‘s report may have to be qualified for uncertainty.
• In the event where errors or irregularities have occurred, ensure that top management is aware of such events.
• Any weakness in the system of accounting and internal control which may give or have given rise to error or irregularity should be fully discussed with and reported to top management.



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