SA 240: the Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements :
The Standard adopts a risk-based approach to auditor’s responsibility relating to fraud in an audit of financial
statements. It, explains how the principles enunciated in 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” would be applied in case of consideration of fraud in an audit of financial statements.
Auditor is concerned with fraud that causes a material misstatement in financial statements. While auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for him to determine whether misstatements in judgment areas such as accounting estimates are caused by fraud or error. Risk of auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud, because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other employees.
Auditor is responsible for maintaining an attitude of professional skepticism throughout the audit. Auditor shall identify and assess risks of material misstatement due to fraud at financial statement level, and at assertion level for classes of transactions, account balances and disclosures. Auditor must make appropriate inquiries of the management. Auditor must discuss with those charged with governance as they have oversight responsibility for systems for accounting risk, financial control and compliance with the law
When auditor identifies a misstatement, s/he should consider whether such a misstatement may be indicative of
fraud and if there is such an indication, s/he should consider the implications of misstatement in relation to other aspects of the audit, particularly the reliability of management representations. When the auditor identifies a misstatement resulting from fraud, or a suspected fraud, s/he should consider auditor’s responsibility to communicate that information to management, those charged with governance and, in some circumstances, when so required by laws and regulations, to regulatory and enforcement authorities also. The auditor should also obtain written representations from management.
The auditor should document the understanding of entity and its environment and the assessment of risks of
material misstatement, responses to assessed risks of material misstatement and communications about fraud
made to management, those charged with governance, regulators and others