ISA 240

Question 1

ISA 240

Answer 1

ISA 240: Auditor’s Responsibilities Relating to Fraud

ISA 240 outlines the auditor’s responsibilities regarding fraud in financial statement audits.

Objectives
1. Identify and assess risks of material misstatement due to fraud.
2. Obtain sufficient appropriate evidence about those risks.
3. Respond appropriately to identified or suspected fraud.

Key Requirements
1. Professional scepticism: Maintain an attitude of professional scepticism, as required by ISA 200.
2. Assessing records and documents: Accept records and documents as genuine unless there’s reason to believe otherwise.
3. Investigating inconsistencies: Investigate inconsistencies in management’s responses to inquiries.

Types of Fraud
1. Fraudulent financial reporting: Manipulation, forgery, or alteration of accounting records, misrepresentation or intentional omission of events or transactions, and intentional misapplication of accounting principles.
2. Misappropriation of assets: Embezzlement, theft of physical assets or intellectual property, causing the entity to pay for goods and services not received, and using entity assets for personal use.

Management Override of Controls
Fraudulent financial reporting often involves management override of controls.

I’ll provide many and varied examples to illustrate the concepts related to ISA 240 and the auditor’s responsibilities regarding fraud.

Examples of Fraudulent Financial Reporting

1. Manipulating accounting records: A company’s management intentionally alters the accounting records to show a higher revenue than actually earned, in order to meet the forecasted earnings per share.
2. Misrepresenting events or transactions: A company fails to disclose a significant lawsuit that may have a material impact on its financial statements, in order to avoid a decline in its stock price.
3. Intentionally misapplying accounting principles: A company incorrectly classifies a loan as a long-term investment, in order to avoid showing a liability on its balance sheet.
4. Management override of controls: A company’s CEO instructs the accounting staff to record a fictitious sale, in order to meet the quarterly sales target.

Examples of Misappropriation of Assets

1. Embezzling receipts: A company’s cashier steals cash receipts and falsifies the accounting records to cover up the theft.
2. Stealing physical assets: A company’s warehouse manager steals inventory and sells it on the black market, without the company’s knowledge or consent.
3. Causing an entity to pay for goods and services not received: A company’s procurement manager creates a fictitious supplier and submits fake invoices for payment, in order to embezzle the funds.
4. Using an entity’s assets for personal use: A company’s CEO uses the company’s aircraft for personal trips, without properly accounting for the usage or reimbursing the company.

Examples of Auditor’s Responsibilities Regarding Fraud

1. Identifying and assessing the risks of material misstatement: An auditor identifies a high risk of fraud in a company’s revenue recognition process and designs additional audit procedures to test the accuracy of revenue transactions.
2. Obtaining sufficient appropriate evidence: An auditor obtains confirmation from a company’s customers to verify the existence and accuracy of sales transactions.
3. Responding to fraud or suspected fraud: An auditor discovers a significant fraud during the audit and immediately reports the matter to the company’s audit committee and management, and considers resigning from the engagement if the fraud is not properly addressed.
4. Maintaining professional scepticism: An auditor is vigilant and investigates any inconsistencies or anomalies in the accounting records, such as unusual journal entries or unexplained changes in account balances.

Examples of Professional Scepticism

1. Questioning management’s representations: An auditor asks management to provide evidence to support their representations about the company’s financial performance and position.
2. Verifying accounting records: An auditor verifies the accuracy and completeness of accounting records, such as sales invoices and inventory records.
3. Investigating inconsistencies: An auditor investigates any inconsistencies or discrepancies in the accounting records, such as unexplained changes in account balances or unusual journal entries.
4. Considering alternative explanations: An auditor considers alternative explanations for any unusual or unexplained transactions or events, rather than simply accepting management’s explanations.

I hope these examples help to illustrate the concepts related to ISA 240 and the auditor’s responsibilities regarding fraud. Let me know if you have any further questions or need additional examples!