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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.
Errors in context of audit has been defined by SA 240 as Unintentional misstatement in the financial
statement.
Management Fraud
Employee Fraud
Fraud raise doubt about the integrity of management & those charged with governance.
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.
- 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.