5.3 - Responsibilities in Relation to Fraud

Question 1

Who is responsible for preventing and detecting both fraud and error?

Answer 1

Both the company’s management and those charged with governance

Question 2

How do these people prevent and detect both fraud and error?

Answer 2

By putting in place a system of internal control over the company’s transactions and then exercising oversight over this system. They must also create a culture of honesty and ethical behaviour

Question 3

What is the auditor responsible for?

Answer 3

Responsible for obtaining reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error

Question 4

What is the first reason that material misstatements from fraud are at a greater risk of not being detected than material misstatements from error?

Answer 4

Fraud may involve sophisticated schemes designed to conceal it

Question 5

What is the second reason that material misstatements from fraud are at a greater risk of not being detected than material misstatements from error?

Answer 5

Fraud may be perpetrated by individuals in collusion

Question 6

What is the third reason that material misstatements from fraud are at a greater risk of not being detected than material misstatements from error?

Answer 6

Management fraud is harder to detect because management is in a position to manipulate accounting records or override control procedures

Question 7

What is the auditor responsible for THROUGHOUT the audit?

Answer 7

Maintaining professional scepticism, considering the possibility of management override of controls and recognising that audit procedures effective for detecting errors may not be effective for detecting fraud

Question 8

What does the ICAEW Code of Ethics say an auditor should do?

Answer 8

Report a fraud to an external, relevant authority