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    SA 240 The auditors responsibility relating to fraud in an audit of financial statements

    A. Scope:

    • This Standard on Auditing (SA) deals with the auditor’s responsibilities relating to fraud in an audit of financial statements.
    • Specifically, it expands on how SA 315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and Its Environment,” and SA 330, “The Auditor’s Responses to Assessed Risks,” are to be applied in relation to risks of material misstatement due to fraud.

    B. Effective Date:

    • This SA is effective for audits of financial statements for periods commencing on or after 1st April 2009.

    C. Responsibility for prevention and detection of Fraud:

    • The primary responsibility for prevention and detection of fraud lies with both Management and Those Charged with Governance (TCWG) of the entity.
    • Those Charged with Governance (TCWG): The person(s) or organization(s) (e.g., a corporate trustee) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overseeing the financial reporting process. For some entities, those charged with governance may include management personnel, for example, executive members of a governance board of a private or public-sector entity, or an owner-manager.
    • Management and TCWG should place a strong emphasis on fraud prevention.
    • This involves a commitment to creating a culture of honesty and ethical behavior.

    D. Auditor’s Responsibilities:

    • To obtain reasonable assurance that the financial statements as a whole are free from material misstatements.
    • Consider the risk of Material Misstatement
    • To maintain an attitude of professional skepticism throughout the audit.

    E. Auditor’s Objective:

    • To identify and assess the risk of material misstatement in the Financial Statements due to fraud,? To obtain sufficient appropriate audit evidence about the assessed risk of material misstatement due to fraud, through designing and implementing appropriate audit procedures; and? To appropriately responds to identified and suspected fraud.

    F. Misstatement in Financial Statements:

    • Misstatements in Financial Statements may arise either due to fraud or error, whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional.

    G. What is Fraud?


    H. Types of Fraud:

    • Employee Fraud: It refers to the fraud committed by an employee against the company or an organization such as Asset Misappropriation, Misappropriation of Goods etc.,
    • Management Fraud: It involves falsifying the financial information for the benefit of the person committing the crime. This includes malafide transactions, bogus trades etc.,

    I. Fraud Triangle:


    J. Audit Considerations at planning stage relating to fraud:

    • Approach work with Professional skepticism
    • Discussion among the audit engagement team
    • Assessthe risk of fraud

    K. Audit Procedures to be performed when circumstances indicate the possibility of Fraud:

    • Communicate the misstatement to the management on a timely basis
    • If required, by Laws and Regulations, the auditor should report about it to the regulatory and enforcement authorities also,
    • Communicate the weakness in internal controls to management
    • If his suspicion is confirmed: 
    1. Communicate the findings to an appropriate level of management and discuss the approach for further investigation, he may advise the management to take the legal advice
    2. Consider the implications of misstatement in relation to other aspects of the audit, particularly the reliability of management’s representations
    3. Ascertain whether any management’s disclosure to this effect in management’s disclosure is required but not done, he should suitably indicate the same in his audit report.
    • If his suspicion is neither confirmed nor dispelled:
    1. Assessthe impact of such fraud or error on financial statements and also assess their impact, in light of SA’s in the audit report
    • If the auditor is unable to complete the engagement:
    1. He should consider the professional and legal requirements for reporting them
    • If he decides to withdraw from the engagement, he should discuss it with appropriate management and those charged with governance
    • He may also consider legal or professional requirements for reporting reasons for such withdrawal.

    L. Subsequent discovery of undetected material misstatements

    In case of any subsequent discovery of material misstatements of financial information either due to fraud or error, the auditor shall not be held liable for non-detection, if he has adopted adequate procedures that are in conformity with basic principles governing an audit and has issued an appropriate audit report based on the results of such procedures.

    M. Documentation

    The auditor shall maintain documentation as per SA 315 and SA 330 and it is the responsibility of the Auditor to document the communication about the fraud made to Management, Those Charged with Governance, Regulators, and others.

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