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The responsibilities of internal and external auditors in relation to the risk of fraud and error differ.

      

The responsibilities of internal and external auditors in relation to the risk of fraud and error differ.

Explain the responsibilities of external auditors in respect of the risk of fraud and error in an audit
of financial statements

  

Answers


Wilfred
External auditors: fraud and error in an audit of financial statements
External auditors are required by ISA 240 to consider the risks of material misstatements
in the financial statements due to fraud. Their audit procedures will then be based on a risk
assessment. Regardless of the risk assessment, auditors are required to be alert to the
possibility of fraud throughout the audit and maintain an attitude of professional skepticism,
notwithstanding the auditors’ past experience of the honesty and integrity of management
and those charged with governance. Members of the engagement team should discuss the
susceptibility of the entity’s financial statements to material misstatements due to fraud.
Auditors should make enquiries of management regarding management’s assessment of
fraud risk, its process for dealing with risk, and its communications with those charged with
governance and employees. They should enquire of those charged with governance about
the oversight process.
Auditors should also enquire of management and those charged with governance about any suspected or actual instance of fraud.
Auditors should consider fraud risk factors, unusual or unexpected relationships, and assess
the risk of misstatements due to fraud, identifying any significant risks. Auditors should
evaluate the design of relevant internal controls, and determine whether they have been
implemented.
Auditors should determine an overall response to the assessed risk of material misstatements
due to fraud and develop appropriate audit procedures, including testing certain journal
entries, reviewing estimates for bias, and obtaining an understanding of the business
rationale of significant transactions outside the normal course of business. Appropriate
management representations should be obtained.
Auditors are only concerned with risks that might cause material error in the financial
statements. External auditors might therefore pay less attention than internal auditors to
small frauds (and errors), although they must always consider whether evidence of single
instances of fraud (or error) are indicative of more systematic problems.
I t is accepted that because of the hidden nature of fraud, an audit properly conducted in
accordance with ISAs might not detect a material misstatement in the financial statements
arising from fraud. In practice, routine errors are much easier to detect than frauds
Where auditors encounter suspicions or actual instances of fraud (or error), they must
consider the effect on the financial statements, which will usually involve further investigations.
They should also consider the need to report to management and those charged with
governance.
Where serious frauds (or errors) are encountered, auditors need also to consider the effect
on the going concern status of the entity, and the possible need to report externally to third
parties, either in the public interest, for national security reasons, or for regulatory reasons.
Many entities in the financial services sector are subject to this type of regulatory reporting
and many countries have legislation relating to the reporting of money laundering activities,
for example.
Wilfykil answered the question on April 12, 2019 at 09:43


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