Explain the responsibility of auditors for the detection of Fraud and Error.

Auditing and Assurance Revision Questions and Answers

As described in NSA 200, “Overall Objectives of Independent Auditor and Conduct of Audit in Accordance with NSAs” the primary objective of an audit of financial statements is to enable the auditor to express an opinion whether the financial statements are prepared, in al material respects, in accordance with an identified financial reporting framework or relevant practices. However, the auditor while carrying out the audit is required to consider the risk of material misstatements in the financial statements resulting from fraud and error.

An audit conducted in accordance with NSA or relevant practices is designed to provide reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused fraud or error. The fact that an audit is carried out may act as deterrent, but the auditor is not and cannot be held responsible for the prevention of fraud and error.

An auditor cannot obtain absolute assurance that material misstatements in the financial statements will be detected. Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with NSAs. An audit does not guarantee all material misstatements will be detected because of such factors as the use of judgment, the use of testing, the inherent limitation of internal control and the fact that much of the evidence available to the auditor is persuasive rather than conclusive in nature for these reasons, the auditor is able to obtain only reasonable assurance that material misstatements in the financial statements will be detected.

The auditor‟s opinion on the financial statements is based on the concept of obtaining reasonable assurance; hence, in an audit, the auditor does not guarantee that material misstatements, whether from fraud or error, will be detected. Therefore, the subsequent discovery of a material misstatement of the financial statements resulting from fraud or error does not, in and of itself, indicate:
(a) A failure to obtain reasonable assurance;
(b) Inadequate planning, performance or judgment;
(c) The absence of professional competence and due care, or;
(d) A failure to comply with NSAs

This is particularly the case for certain kinds of intentional misstatements, since auditing procedures may be ineffective for detecting an intentional misstatement that is concealed through collusion between or among one or more individuals among management, those charged with governance, employees, or third parties, or involves falsified documentation. Whether the auditor has performed an audit in accordance with NSAs is determined the adequacy of the audit procedures performed in the circumstances and the suitability of the auditor‟s report based on the result of these procedures.

In planning the audit, the auditor should discuss with other members of the audit team the susceptibility of the entity to material misstatements in the financial statements resulting from fraud or error.

The auditor should supplement his/her own knowledge of the entity‟s business making inquiries of management regarding management‟s own assessment of the risk of fraud and the systems in place to prevent and detect it. In addition, the auditor should also make inquires of management regarding the accounting and internal control systems in place to prevent and detect error. Since management is responsible for the entity‟s accounting and internal control systems and for the preparation of the financial statements, it is appropriate for the auditor to inquire of management how it is discharging these responsibilities.

If the circumstances indicate the possible existence of fraud and error, the auditor should consider the potential effect of the suspected fraud and error on the financial information. The auditor should obtain evidence to confirm and report accordingly.

The auditor also has the responsibility to communicate the misstatement due to fraud and error to the appropriate level of management on a timely manner and consider the need to report to it then charged with governance. He/she should consider the effect of fraud and error and suitably made adjustment to his report and disclosure requirements of programs and data.

(Visited 31 times, 1 visits today)
Share this on:

Leave a Reply

Your email address will not be published. Required fields are marked *