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SA-240, “Auditors Responsibility to Consider Fraud and Error in an Audit of Financial Statements”, deals at length with the auditor’s responsibilities for the detection of material misstatements resulting from fraud and error when carrying out an audit of financial information and to provide guidance as to the procedures that the auditor should perform when he encounters circumstances that cause him to suspect, or when he determines, that fraud or error has occurred. Broadly, the general principles laid down in the SA may be noted as under:
(i) In planning and performing his examination, the auditor should take into consideration the risk of material misstatement of the financial information caused by fraud or error. He should inquire of management as to any fraud or significant error which has occurred in the reporting period and modify his audit procedures, if necessary.
(ii) If circumstances indicate the possible existence of fraud or error, the auditor should consider the potential effect of the suspected fraud or error on the financial information. If the auditor believes the suspected fraud or error could have a material effect on the financial information, he should perform such modified or additional procedures as he determines to be appropriate.
(iii) The auditor should satisfy himself that the effect of fraud is properly reflected in the financial information or the error is corrected in case the modified procedures performed by the auditor confirm the existence of the fraud. In case auditor is unable to obtain evidence to confirm or dispel a suspicion of fraud, the auditor should consider relevant laws and regulations and may wish to obtain legal advice before rendering any report on the financial information or before withdrawing from the engagement.
(iv) The reporting responsibilities would also include communicating with management. When those persons ultimately responsible for the overall direction of the entity are doubted, the auditor may seek legal advice to assist him in the determination of procedures to follow. The auditor should also consider the implications of the circumstances on the true and fair view which the financial statements ought to convey and frame his report appropriately. Where a significant fraud has occurred the auditor should consider the necessity for a disclosure of the fraud in the financial statements and if adequate disclosure is not made, the necessity for a suitable disclosure in his report.
