ISA 240 - The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements

Question 1

ISA 240: The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

Answer 1

> Fraud = Intentional misstatement to deceive someone.
Management/ those charged with Governance, employees, or third party commits Fraud.
Fraud having direct/ indirect impact on the Financial Statements are the area of a concern.

Question 2

ISA 240: Fraud

Answer 2

Fraudulent Financial Reporting:
> Manipulate, falsify, or intentionally ommit the information etc. in order to mislead the Financial Statements.

Misappropriation of Asset:
> Embezzlement of cash.
> Misuse and mismanagement of stock.

Question 3

ISA 240: Fraud Risk Factors:

Answer 3

1) Incentive and Pressure.
2) Peceived Opportunity.
3) Rationalization of act.

Question 4

ISA 240: Responsibility for Fraud Prevention:

Answer 4

Management is primarily responsible for prevention of Fraud.
> They Design the Internal Controls.
> They Prepare Financial Statements.

> Auditor is responsible to give Reasonable Assurance on the Financial Statements.
Auditor to maintain attitude of Professional Scepticism throughout the Audit.

Question 5

ISA 240: 3 Categories discussed by the Standard:

Answer 5

Risk Assessment Procedures:
> Enquire with management.
> Enquire with those charged with Governance.
> Perform Analytical Procedures.
> Other information.

Fraud Risk Factors:
> Is there Incentive and Pressure?
> Is there a Perceived opportunity for Fraud?
> Is it Rationalization of act because of someone’s bad character.

Responses to assessed risk:
> Employee resources with capabilities to check the matter.
> Check any misapplication of Accounting policy done by management.
> Do Surprise/ Spot checks.

> Extend the nature, time and extent of Audit in case of Significant risk.
Identify and Assess risk.
- At Financial Statement Level,
- At Assertion Level.
Default presumption - Fraud with revenue recognition.

Responsibility of Auditor to discontinue the Engagement on Identification of Fraud:
> Communicate with management and TCWG.
> Check Legal responsibility.
> Communicate withdrawal from Engagement with and TCWG and comply with Legal requirements.

Responses to assessed risk

Question 6

ISA 240: Management representation letter and Documentations required:

Answer 6

1) Acknowledge their responsibility with respect to designing, implementing, and operating the Internal Control to prevent, detect and correct the material misstatements due to Fraud.
2) The management Assessment Process is conducted and its results.
3) Disclosed all the information about the Fraud they came across.
4) Disclosed all the allegations related to Fraud / Suspected Fraud against the client and its impact on the Financial Statements.

Thus:
1) Identification and Assessment of Risk of Material Misstatement as per ISA 315.

2) Response to assessed risk - ISA 330

3) Communication/ Response related to risk with Management and TCWG.

4) Non applicability of presumption - presence of Fraud in Revenue items.