SA 240 AUDITORS RESPONSIBILITY TO CONSIDER FRAUD AND

This SA provides extended guidance on the auditor responsibility for identifying and reporting on frauds
and errors.

The primary responsibility for the detection of fraud and error is of those charged with governance and
management of the entity.

Responsibility of auditor

The financial audit is conducted by auditor to obtain reasonable assurance that financial statements are
free from material misstatement caused by fraud and errors. Due to certain inherent limitation, even an
audit that is properly planned and performed in accordance with generally accepted auditing standards
may fail to detect a cleverly concealed fraud.

The term reasonable assurance implies that some risk of material misstatement could be present in
financial statement and the auditor will fail to find it. The auditor therefore cannot be held liable for
prevention of fraud and errors.

If auditor knew about existence of fraud and error in financial statement and still didnt communicate with
appropriate authority then its a serious dereliction of duty on his part and he will be liable to compensate
the third party who has suffered loss as a result of relying on the accounts.

Frauds and Errors

Misstatements in financial statement can be arise from fraud and errors.

Errors in context of audit has been defined by SA 240 as Unintentional misstatement in the financial
statement.

Now Fraud can be of two type:

FRAUD

Management Fraud

Employee Fraud

Generally, it involves theft of

assets. Mostly Cash or goods of the
Management fraud involve manipulation of accounts by
firm, Computer hardware etc. upper level management for the purpose of
misrepresenting firm financial position i.e. Window
Dressing

Fraud raise doubt about the integrity of management & those charged with governance.

SA 240 AUDITORS RESPONSIBILITY TO CONSIDER FRAUD AND

Based on the fraud risk assessment the auditor assesses the inherent and control risk and then determines the level
of detection risk. The auditor then designs the procedures to auditor to address them.
The auditor should plan and perform an audit with an attitude of professional scepticism, it involves

Questioning mind and a critical assessment of audit evidence.

Auditor should conduct the engagement with a mindset that a material misstatement could exist as a
result of fraud, notwithstanding the auditors past experience of the honesty and integrity of the entitys
management.

While collecting and evaluating the audit evidences, the auditor should not be satisfied with less
persuasive evidence because of past experience that management is honest.

Procedures when there is possible misstatement

- If the auditor has identified a fraud or has indication of fraud, the auditor shall communicate these
matters on a timely basis to the appropriate level of management.

- Auditor should perform modified or additional procedures, if the misstatement has a material effect on
financial statements.

- If many material frauds found, then auditor shall consider whether to continue (Yes/No), if No then
discuss the material misstatements with those charged with governance then withdraw.