AT - AUDITOR'S RESPONSIBILITY Flashcards
Misstatements may emanate from?
- Error
- Fraud
- Noncompliance with Laws and Regulation
What is Error?
Error refers to UNINTENTIONAL misstatements in the FS including the omission of an amount or a disclosure such as”
a. Mathematical/clerical mistakes
b. Incorrect accounting estimate
c. Mistake in the application of accounting policies
What is fraud?
Fraud is the intentional act involving the use of deception to obtain an unjust or illegal advantage.
What are the types of fraud? Give examples of each.
- Fraudulent Financial Reporting / Management Fraud - involves intentional misstatement or omissions of amounts or disclosures in the FS to deceive FS users. This may involve:
a. Manipulation/falsification/alteration of
records/documents
b. Misrepresentation in or intentional omission of the
effects of transactions from records or documents
c. Recording of transactions without substance
d. Intentional misapplication of accounting policies. - Misappropriation of assets / Employee Fraud - involves theft of an entity’s assets committed by its employees, which may include:
a. Embezzling receipts
b. Stealing assets
c. Lapping of AR
What is the difference between the auditor’s responsibility for the detection of fraud vs error?
The auditor’s responsibility for detecting fraud and error is ESSENTIALLY THE SAME.
What are the responsibilities of management and TCWG for the prevention of fraud and error?
Management is responsible for ESTABLISHMENT OF A CONTROL ENVIRONMENT and to IMPLEMENT INTERNAL CONTROL POLICIES AND PROCEDURES designed to DETECT AND PREVENT FRAUD.
TCWG is charged with GOVERNANCE OF AN ENTITY to ENSURE THE INTEGRITY OF AN ENTITY’S ACCOUNTING AND FINANCIAL REPORTING SYSTEMS and that APPROPRIATE CONTROLS ARE IN PLACE.
What are fraud risk factors?
Fraud risk factors are events or conditions that provide an opportunity/motive/means to commit fraud, or indicate that fraud may already have occurred.
What should an auditor do when he believes that a misstatement is due to fraud, but the effect is not material?
- Refer the matter to appropriate level of management AT LEAST ONE LEVEL ABOVE THOSE INVOLVED.
- Be satisfied that, given the position of the likely perpetrator, the fraud has no other implications for other aspects of the audit or that those implications have been adequately considered.
What should an auditor do when he believes that a misstatement is due to error?
Errors will only require adjustment to the FS.
What should an auditor do when he believes that a misstatement is due to fraud and the effect is material? What should he do when he is unable to evaluate whether the effect is material or immaterial?
When the auditor detects material misstatement due to fraud, or is not sure whether the effect on FS is material or not, he should:
- Consider the implication for other aspects of the audit
- Discuss the matter and investigate with an appropriate level that is at least one level above those involved.
- Attempt to obtain evidence to determine whether a material fraud in fact exists
- Suggest that the client consult with legal counsel
What is noncompliance?
Noncompliance refers to the acts or omission or commission by the entity being audited, either intentional or unintentional which are contrary to laws or regulations, such as:
a. Tax evasion
b. Violation of environmental protection laws
c. Inside trading of securities
What is the responsibility of management with respect to noncompliance?
Management is responsible for ensuring that the entity’s operations are conducted in accordance with laws and regulations. Management is also responsible for the prevention and detection of noncompliance.
What kind of noncompliance are auditors primarily concerned with?
Auditors are primarily concerned with NONCOMPLIANCE THAT WILL HAVE A DIRECT AND MATERIAL EFFECT IN THE FS.
Auditors do not normally design audit procedures to detect noncompliance that will not directly affect fair presentation of FS.
What are the auditor’s responsibility and procedures taken when it comes to the possibility of misstatements to the FS due to fraud and error?
- Planning Phase
a. Auditor should make inquiries of management about possibilities of misstatements due to fraud and error
b. Auditor should assess the risk that fraud or error may cause the FS to contain material misstatements - Testing Phase
a. Auditor should perform procedures necessary to determine whether material misstatements exist
b. After identifying material misstatements, consider whether such resulted from a fraud or error - Completion Phase
a. Auditor should obtain written representation from management that:
- it acknowledges its responsibility for implementation and operation of internal controls to prevent and detect fraud and error
- disclosed to the auditor all significant facts relating to any fraud or suspected fraud known to management that may have affected the entity
- disclosed to the auditor the results of assessment of risk that FS may be materially misstated as a result of fraud - Consideration of effect of auditor’s report
a. If auditor believes that material error or fraud exists, he should request management to revise the FS, otherwise issue a qualified or adverse opinion
b. If auditor is unable to evaluate the effect of fraud on the FS because of scope limitations, auditor should issue either qualified or disclaimer of opinion.
What are the auditor’s responsibility and procedures taken when it comes to the noncompliance?
Audit cannot be expected to detect noncompliance with all laws and regulations, nevertheless, the auditor should recognize that noncompliance may materially affect the FS
- Planning phase
a. Auditor should obtain a general understanding of the legal and regulatory framework applicable to the entity
b. Design procedures to help identify instances of noncompliance
c. Design audit procedures to obtain sufficient appropriate audit evidence about compliance with those laws and regulations - Testing phase
a. Auditor should obtain an understanding of nature of the act and circumstances in which the noncompliance occurred and evaluate possible effects on the FS
b. Auditor should document the findings, discuss them with management and consider the implication - Completion phase
a. Auditor should obtain written representation that management has disclosed all known actual/possible noncompliance that could materially affect the FS
b. If auditor believes that there is noncompliance, he should request management to revise the FS, otherwise issue a qualified or adverse opinion
c. If a scope limitation precludes auditor from obtaining sufficient appropriate evidence, issue a qualified or disclaimer of opinion
Which of the following would be least likely to suggest to an auditor that the client’s FS are materially misstated?
a. There are numerous delays in preparing timely internal financial reports
b. Management does not correct material internal control
c. Differences are reflected in the customer’s confirmation replies
d. There have been two new controllers this year
B.
Which of the following circumstances would least likely cause an auditor to consider whether material misstatements exist in an entity’s FS?
a. Management is dominated by several individuals
b. The industry in which the entity operates is declining
c. There is inadequate working capital due to declining profit
d. Supporting records that should be readily available are frequently not produced when requested.
A.
If an auditor believes that material errors or fraud exist, the auditor should
a. Consider the implications and discuss the matter with appropriate levels of management
b. Make the investigation necessary to determine whether errors or fraud have in fact occurred
c. Request that management investigate whether errors or fraud have in fact occurred
d. Consider whether errors or fraud were the result of employees failure to comply with specific controls
A.
When a user sees that an unmodified opinion has been expressed by an external auditor, he can infer that:
a. no material errors were found during the engagement
b. no embezzlements remain undetected
c. any system defects encountered in the engagement have been corrected to the auditor’s satisfaction
d. Any differences between management and the auditor on accounting matters have been resolved to the auditor’s satisfaction
D.
