Circumstances

Question 1

Circumstances

Answer 1

When an auditor finds evidence of fraud or potential fraud, it’s crucial to communicate this to the appropriate level of management promptly. This communication ensures that the issue is addressed and mitigated effectively.

1. Appropriate Level of Management:
   
   • Professional Judgment: The auditor uses professional judgment to determine the appropriate level of management to inform. Typically, this is at least one level above the person(s) involved in the suspected fraud.
   • Inconsequential Matters: Even if the fraud seems minor, it should still be reported to ensure transparency and proper action.

1. Instances for Communication:
   
   • Management Involvement: If management is involved in the fraud or suspected fraud, it is essential to communicate this to TCWG.
   • Other Involvements: The auditor may also decide to inform TCWG about fraud involving individuals other than management, depending on the severity and impact.
2. ISA 260:
   
   • While ISA 260 (Communication with Those Charged with Governance) is outside the CAF-9 syllabus, it’s important to understand that it guides auditors on when and how to communicate with TCWG about significant matters, including fraud.

1. Doubts About Integrity:
   
   • Legal Advice: If the auditor has doubts about the integrity or honesty of management or TCWG, it may be appropriate to seek legal advice. This helps determine the best course of action and ensures the auditor’s responsibilities are met without compromising the audit’s integrity.

Scenario: An auditor discovers that a mid-level manager has been manipulating financial records to meet performance targets.

Actions:
1. Report to Higher Management: The auditor reports the findings to senior management, one level above the involved manager.
2. Inform TCWG: Since the fraud involves management, the auditor also informs TCWG to ensure they are aware and can take appropriate action.
3. Seek Legal Advice: If there are concerns about the honesty of senior management or TCWG, the auditor may seek legal advice to navigate the situation appropriately.

By following these guidelines, auditors can ensure that fraud is addressed promptly and effectively, maintaining the integrity of the financial reporting process. If you have any further questions or need more detailed examples, feel free to ask!