Fraud and Error - ACCA Audit and Assurance (AA)
Summary
TLDRThis lecture discusses the auditor's responsibility towards fraud and errors in financial statements. Fraud can be financial reporting to boost share prices or misappropriation of assets. Auditors have no specific duty to detect fraud, but should spot material misstatements. Errors should be reported to management, and if material, may lead to financial statement qualifications. The lecture emphasizes the importance of internal controls and integrity in detecting and reporting fraud and errors.
Takeaways
- ๐ The auditor's responsibility towards fraud and error in financial statements is primarily to ensure they are free of material misstatements, whether caused by fraud or error.
- ๐ผ Fraud can be categorized into two types: financial statement fraud, which might involve overstating profits to boost share prices or secure loans, and asset misappropriation, which involves theft or misuse of company assets.
- ๐ While auditors have no specific duty to detect fraud, they are responsible for identifying material misstatements that could significantly affect financial statements.
- ๐ก Management is responsible for establishing proper systems and internal controls to prevent or detect fraud, not the auditors.
- ๐ The likelihood of auditors detecting small, individual instances of fraud is relatively low, but they must be vigilant for material misstatements that could result from fraud.
- ๐จ Upon discovering fraud, auditors must report it to management and assess whether it is an isolated incident or part of a larger, ongoing issue.
- ๐ Errors in financial statements, no matter how small, should be reported to management, as they could potentially lead to material misstatements.
- ๐๏ธ If management does not correct identified errors, auditors must evaluate the impact of these errors and obtain written representations from management regarding their materiality.
- ๐ซ In the event of a material misstatement due to error, and management refuses to correct it, auditors may have to consider qualifying their opinion on the financial statements.
- โ If the financial statements contain material misstatements that are not corrected, auditors may need to issue an adverse opinion, indicating that the statements do not present a true and fair view.
Q & A
What is the auditor's responsibility towards fraud and error in financial statements?
-The auditor's responsibility is to ensure that financial statements are free of material misstatements, whether caused by fraud or error. They have no specific duty to detect fraud, but they should be aware that it can happen and should follow up on any suspicions.
What are the two levels of fraud mentioned in the lecture?
-The two levels of fraud are fraudulent financial reporting, which includes overstating profits to boost share prices or get loans, and misappropriation of assets, which involves theft or misuse of company assets.
Why is it management's responsibility to prevent or detect fraud?
-Management is responsible for ensuring there is a proper system and internal control in place to prevent or detect fraud. The auditors' role is to provide reasonable assurance that the financial statements are free of material misstatements.
What should an auditor do if they discover a fraud?
-If an auditor discovers a fraud, they must report it to management. They should also investigate whether it is an isolated incident or part of a larger pattern of fraud within the company.
How does the auditor determine if a misstatement is material?
-A misstatement is considered material if it is large enough to influence the decisions of users of the financial statements. The auditor should be alert to any misstatements and assess their materiality.
What is the auditor's approach to errors in financial statements?
-The auditor should identify all misstatements, even very small ones, and report them to management. Errors should be corrected, but if they are immaterial, the auditor may not insist on their correction.
What happens if management does not correct a material misstatement?
-If management does not correct a material misstatement, the auditor may have to consider qualifying the financial statements, indicating that they do not present a true and fair view.
Why is it important for the auditor to be aware of the susceptibility of a company to fraud?
-Being aware of the susceptibility to fraud allows the auditor to plan the audit accordingly and to be more vigilant in areas where the risk of fraud is higher.
What is the role of internal controls in preventing fraud?
-Internal controls are designed to prevent or detect fraud by ensuring proper authorizations, segregation of duties, and other checks and balances within the company.
How does the auditor ensure that the financial statements show a true and fair view?
-The auditor ensures a true and fair view by identifying and addressing material misstatements and by obtaining written representations from management that they believe the financial statements are accurate.
What is the significance of the auditor's statement that the financial statements are free of material misstatements?
-This statement provides reasonable assurance to stakeholders that the financial statements are accurate and reliable, but it is not a guarantee. It reflects the auditor's professional judgment and the results of their audit procedures.
Outlines
๐ Auditor's Responsibility Towards Fraud and Errors
This paragraph discusses the responsibilities of auditors in relation to fraud and errors in financial statements. Fraud is categorized into two types: fraudulent financial reporting, which might involve overstating profits to attract investors or loans, and misappropriation of assets, such as theft of inventory or cash. The primary responsibility for preventing or detecting fraud lies with the management and their internal control systems. Auditors are not specifically tasked with detecting fraud but are expected to identify material misstatements in financial statements, whether due to fraud or error. The auditor's role is to provide reasonable assurance that the financial statements are free from material misstatements. Upon discovering fraud, auditors must report it to management and assess the extent of the issue. If the fraud is material, it must be corrected; otherwise, the auditor may have to qualify their opinion on the financial statements.
๐ Reporting Misstatements and Errors in Financial Statements
The second paragraph focuses on the protocol for addressing misstatements and errors discovered during an audit. All identified misstatements, regardless of size, should be reported to management. While auditors are not concerned with immaterial errors, they must ensure that material misstatements are corrected. If management chooses not to correct these errors, auditors must evaluate the impact of the uncorrected errors and obtain written representations from management that the errors are not material. In cases where there is a material misstatement that management refuses to correct, the auditor may have to issue a qualified opinion on the financial statements, indicating that they do not present a true and fair view due to the misstatement.
Mindmap
Keywords
๐กFraud
๐กError
๐กAuditor's Responsibility
๐กFinancial Statements
๐กMaterial Misstatement
๐กInternal Controls
๐กSegregation of Duties
๐กQualification
๐กAdverse Opinion
๐กManagement
๐กRepresentations
Highlights
The auditor's responsibility towards fraud and error in financial statements is discussed.
Fraud is deliberate stealing or overstating profits, while error is accidental.
There are two levels of fraud: financial reporting and misappropriation of assets.
Financial reporting fraud aims to boost share prices or encourage investment.
Misappropriation of assets involves theft of inventory or cash.
Management is responsible for preventing or detecting fraud through proper internal controls.
Auditors have no specific duty to detect fraud but should spot material misstatements.
The auditor's role is to provide reasonable assurance that financial statements are free of material misstatements.
Planning should consider the susceptibility of companies to fraud based on their operations and internal controls.
Once fraud is discovered, it must be reported to management.
The discovery of fraud raises questions about its extent and duration.
Errors in financial statements, even small ones, should be reported to management.
Auditors do not certify 100% accuracy but look for material misstatements.
Management may decide not to correct immaterial errors, but auditors should assess the impact.
If a material misstatement is not corrected, it may lead to a qualification of the financial statements.
An adverse opinion may be given if the financial statements do not show a true and fair view due to material misstatements.
Transcripts
this is a lecture from open tuition to
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open tuition comm so what is the
auditors responsibility towards fraud an
error in the financial statements
well fraud is deliberate stealing of
cash assets or indeed overstating
profits arrow is accidental I suppose at
the end of the day they can have the
same financial effect what first of all
is the auditors responsibilities with
regard to fraud and the first thing we
can say is there are two two levels of
fraud there is fortune and financial
reporting this is where maybe to boost
the share price or maybe to encourage
investors in a company or to encourage
the bank to give a loan maybe we
overstate the profits of the company you
make it look a much healthier less risky
comes in and ready is and this is what
induces the investors in the bank to
provide you with capital or you report
inflated profits in the hope that the
share price will be driven up so you can
then sell the shares oh you cover up
losses in some way in in the hope that
okay we've made two huge losses this
year that we don't want to tell anyone
about that all there was it was
confidence and we'll cover up those
losses in the hope that in the
subsequent years will will come good so
I can do huge damage to investors banks
financial institutions members the other
type of fraud is the misappropriation of
assets from the company the theft of
inventory the misappropriation of cash
it can be awarding contracts at a very
high price so that the the buyer gets
you know 20% kind of kickback a
commission this is essentially stealing
money from the company so how these two
levels of fraud
and both are potentially serious the
biggest question really is what does the
auditor's responsibilities towards
discovering fraud or D preventing fraud
and the simple answer is relatively
little it is management's responsibility
to ensure that is a proper system and
internal control which should be
sufficiently good prevent or detect
fraud the auditors have no specific duty
to detect fraud and indeed many frauds
are relatively small repeat is very
often and the chance of an order - may
be picking up small fraudulent
transactions is really quite small
probably not a good use of their time in
fact but when the Ford gets large and it
becomes so large as it's going to cause
a material misstatement in the financial
statements then like any material
misstatement caused for any reason
whether innocently or fraudulently then
the auditors should have spotted that
they they say in the audit report that a
gives reasonable assurance that the
financial statements are free of
material misstatements okay it's not a
guarantee but no one is really very
happy if material misstatements get into
the published financial statements so no
routine ongoing needed to discover fraud
but you should be aware that it can
happen as far as the planning you should
be aware that some companies are going
to be more susceptible to fraud another
simply because of they may be the sort
of operations they're in and you should
be aware that the internal controls are
very poor then this opens the door very
often to fraud because maybe you don't
have segregation of duties you don't
have proper authorizations and so on
once a fraud is discovered it has to be
reported to management the big question
of course is is if you discover a fraud
let's say of $20 is is this just an
isolated fraud carried out once by one
person or is it really the tip of the
iceberg how long has it been going on
how much money over the course of the
fraud has been sucked out of the company
how many people are involved we we need
to get to that in a way are our
suspicions have been alerted once small
fraud is discovered we we can't kind of
pretend we didn't see it we must act
with integrity and to follow it up with
regard to errors in general on the
statements identified all misstatements
even very small ones should be reported
to management it would be a peculiar if
you discovered even a small error maybe
of you know $25 and just kind of kept
quiet about it why not why not show this
to management management may decide not
to bother correcting it and it says a
certain element of embarrassment here of
course the accounting people have
prepared the financial statements
presumably the finance director has kind
of approved those finance financial
statements and here the order two comes
in and finds lots of little little
errors it's kind of a little bit
embarrassing if the finance director has
to maybe go back to the board and say
well a profit has been adjusted because
of these small errors we don't really
care auditors don't really care about
immaterial errors it's not their purpose
to certify the 100% accuracy we're
looking for material misstatements you
should be asked the asking manager to
correct them all or may not see really
the proper thing to do but if management
doesn't correct them then you have to
think well how we Tyrael is that error
and make your own mind up but also get
representations written representations
from management that they themselves
think that the honor corrected errors
are not material and the presumably you
would agree with those if there is a
material misstatement and error and you
think it is material and it should be
changed then really if they don't change
it you're going to be heading towards
some sort of qualification of the
financial statements you are saying
these financial statements contain in
the man which is materially incorrect so
we're going down and saying except for
the fact that receivables had been
overstated the financial statements show
a true and fair view or you might say
because of the receivable has been
overstated by five million and the
effect and the profit would be to turn a
profit
three million into a loss of two million
we think that the financial statements
do not show true and fair view you'd be
looking at an adverse opinion
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