AssuranceAuditing Standards

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

By December 1, 2018 No Comments


Fraud – An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

 Professional Skepticism

The auditor shall use the professional skepticism to ask questions to get the confirmation whether information and audit evidence obtained provide the suggestion to the auditor that  material misstatement exist due to fraud.

 Discussion among the Engagement Team

If there is any susceptibility regarding the financial statements of the entity and misstatement is material due to fraud should be discussed with the engagement team.

Give permission to the auditor for thinking about the result of audit procedures and how to discuss it with the engagement team. In the discussion the auditor will determine how to deal with allegation due to fraud that resist the auditor.

Provide opportunity to an experience member of the team to determine the susceptibility due to fraud in the financial statements of entity.

 Risk Assessment Procedures and Related Activities

For the understanding of entity and its environment the auditor performs risk assessment procedures and related activities. The auditor shall perform the following procedures in order to obtain information which is useful for identifying the risks of material misstatement due to fraud.

1) Inquiry of management by applying professional skepticism to evaluate management response because management can perpetrate the fraud

2) The should Inquire the Internal Audit and its procedures performed during the year for detection of fraud

3) The auditor shall obtain the understanding of Those Charged With Governance.

Identification and Assessment of the Risks of Material Misstatement Due to Fraud

The auditor shall identify and assess the risks of material misstatement due to fraud at the financial statement level, and at the assertion level for classes of transactions, account balances and disclosures.

 Responses to the Assessed Risks of Material Misstatement Due to Fraud

For addressing the risk of material misstatement due to fraud the auditor shall determine the overall response of conduct of audit that lead toward increase in professional skepticism. In case of addressing the overall response of audit conduct the auditor shall keep in mind;

  • Assignment and Supervision of Personnel
  • Unpredictability in the Selection of Audit Procedures and
  • Audit Procedures Responsive to Assessed Risks of Material Misstatement Due to Fraud at the
  • Assertion Level.

 Evaluation of Audit Evidence

The analytical procedures performed by the auditor at the end of the audit shall be evaluated by the auditor. This will help the auditor in the over conclusion of the auditor in respect of financial statements whether they are consistent with the understanding of auditor. This will further provide indication of previous unrecognized risk of material misstatement. After identification of misstatement the auditor shall require to determine whether the misstatement is indicative of fraud and further he will evaluate the its impacts on nature  timing and extent of audit procedures to response to risk of material misstatement.

 Auditor Unable to Continue the Engagement

If due misstatement as a result of fraud in the financial statements the auditor is unable to continue to perform audit the auditor shall

(i)Determine the professional and legal responsibilities applicable in the circumstances, including whether there is a requirement for the auditor to report to the person or persons who made the audit appointment or, in some cases, to regulatory authorities;

(ii) Consider whether it is appropriate to withdraw from the engagement, where withdrawal is possible under applicable law or regulation;

Written Representations

The auditor shall obtain written representations from management and, where appropriate, those charged with governance that:

(1) They acknowledge their responsibility for the design, implementation and maintenance of internal control to prevent and detect fraud;

(2) They have disclosed to the auditor the results of management’s assessment of the risk that the financial statements may be materially misstated as a result of fraud;

(3) They have disclosed to the auditor their knowledge of fraud, or suspected fraud, affecting the entity involving:

(i) Management;

(ii) Employees who have significant roles in internal control; or

(iii) Others where the fraud could have a material effect on the financial statements

Communications to Management and with Those Charged with Governance

If it is identified by the auditor that the fraud is exist or the auditor has obtained information that lead toward indication of fraud that might be exist. The auditor shall inform the management about this fact on timely basis in order to detect the fraud.

Communications to Regulatory and Enforcement Authorities

If the auditor has identified or suspects a fraud, the auditor shall determine whether there is a responsibility to report the occurrence or suspicion to a party outside the entity. Although the auditor’s professional duty to maintain the confidentiality of client information may preclude such reporting, the auditor’s legal responsibilities may override the duty of confidentiality in some circumstances.


The auditor shall include the following in the audit documentation of the auditor’s understanding of the entity and its environment and the assessment of the risks of material misstatement.

  • The significant decisions reached during the discussion among the engagement team regarding the susceptibility of the entity’s financial statements to material misstatement due to fraud; and
  • The identified and assessed risks of material misstatement due to fraud at the financial statement level and at the assertion level.
  • The overall responses to the assessed risks of material misstatement due to fraud at the financial statement level and the nature, timing and extent of audit procedures and
  • The results of the audit procedures, including those designed to address the risk of management override of controls.

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