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AAA Session 5

The document discusses professional and ethical considerations for auditors, including the ACCA Code of Ethics, professional skepticism, and responsibilities related to fraud detection and reporting. It outlines the roles of management and auditors in preventing and addressing fraud, as well as the legal liabilities auditors face towards clients and third parties. Additionally, it addresses the expectation gap between public perception and actual auditor capabilities, suggesting ways to narrow this gap.

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5 views7 pages

AAA Session 5

The document discusses professional and ethical considerations for auditors, including the ACCA Code of Ethics, professional skepticism, and responsibilities related to fraud detection and reporting. It outlines the roles of management and auditors in preventing and addressing fraud, as well as the legal liabilities auditors face towards clients and third parties. Additionally, it addresses the expectation gap between public perception and actual auditor capabilities, suggesting ways to narrow this gap.

Uploaded by

bhuvan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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PART B - PROFESSIONAL AND ETHICAL

CONSIDERATIONS

SESSION 4
 ACCA Code of Ethics
 Ethical Threats
 Safeguards
 Examples of Ethical Threats and Safeguards

SESSION 5
 Professional Scepticism
 ISA 240 – Fraud & Error
 Professional Liability for Auditors
 Expectation Gap

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SESSION 5 – FRAUD & PROFESSIONAL LIABILITY

PROFESSIONAL SCEPTICISM

Professional scepticism is 'an attitude that includes a questioning mind,


being alert to conditions which may indicate possible misstatement due to
error or fraud, and a critical assessment of audit evidence'.
Professional judgement is the 'application of relevant training,
knowledge and experience in making informed decisions about the
courses of action that are appropriate in the circumstances of the audit
engagement'.
The audit strategy will be impacted in the following way –
 The auditors may not choose to rely on the written representations
provided by management

 The materiality level may be reduced

 Evidence provided by the audit client will not be relied upon


anymore.

 The auditors will have to generate more third party evidence

 More focus will be provided on the area on which fraud is


suspected

ISA 240 - FRAUD AND ERROR

Fraud – An intentional act involving the use of deception to obtain an


unjust or illegal advantage
There are 2 types of fraud:

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 Misappropriation of assets
 Fraudulent financial reporting

Error – An unintentional misstatement in financial statements, including


the omission of an amount or a disclosure

Irregularity – An intentional misstatement to mislead users


If a material error is identified, but not corrected it becomes an
irregularity

MANAGEMENT RESPONSIBILITIES

Prevention and detection of fraud is the responsibility of management.


Responsibilities of management includes:
 Introduction of a culture of honesty and ethical behavior

 Implementation of internal controls to take as precautions against


fraud and error

 The responsibility for monitoring and implementing the internal


controls lies with the Internal Audit function

 Active oversight by Those Charged With Governance

AUDITOR RESPONSIBILITIES

However, auditor may detect a fraud or error, even though there is no


responsibility to do so, because it may lead to a material misstatement in
the financial statements.

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Page 3 of 7
 At the Planning Stage, the auditor must consider the risk of
material misstatement due to fraud and error when planning and
performing their audit

 The Auditors should maintain professional skepticism throughout


the audit

 They should obtain reasonable assurance that FS are free from


material misstatements that may have been caused due to fraud
and error

 If a material misstatement has occurred , the auditor is responsible


for detecting the particular fraud and error

 If immaterial, there is no responsibility to detect them, however,


this should be reported to those charged with governance

The inherent limitations of audit mean that the auditor cannot guarantee
that the financial statements are free from fraud and error.

REPORTING RESPONSIBILITIES

 We can report to the appropriate level of management, if and only if,


they are not involved in the fraud

 Then you can report to Those charged with governance

 If they are also involved in the fraud, then the auditor will report to
the Regulatory or enforcement authorities after seeking legal advice

If a misstatement is discovered, the audit impact needs to be


considered

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This is done by:

 Looking at the nature and circumstance of the offence

 Gathering information about the effect of the offence in the FS

 If material, then we need to carry out more procedures on the area

 Then the offence should be communicated to Those Charged With


Governance

 Ensure that they have an intention to rectify the error, if not, report
to the regulatory authority or enforcement authorities after seeking
legal advice

Fraud and error must be reported to management or the audit committee


as soon as possible. It can be reported to the shareholders if the
management as well as TCWG is involved with the fraud. This is done
by modifying the audit opinion by including a paragraph in the audit
report

PROFESSIONAL LIABILITY FOR AUDITORS

LIABILITY TO CLIENTS
The auditors have a contract with their client. A professional liability
arises when there is a breach of this contract law.
The auditors therefore has a duty to demonstrate “due care and skill”.
In order for them to demonstrate this without any negligence, they must
follow the professional, ethical, as well as quality control standards. They
must also comply with the terms and conditions stated in the Audit
engagement Letter.

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Page 5 of 7
LIABILITY TO THIRD PARTY
A third party can sue the auditors if the auditors have breached the law
of tort. The law of tort actually means you have to look at 3 things –
 The auditors must demonstrate a “duty of care”.
 Has the auditors breached any standards?
 Has the third party occurred any financial loss as a result on
relying on the auditors?

DUTY OF CARE
A duty of care exists when there is a special relationship between the
parties.
The third party must prove the following things –
 Whether auditor knew or should have known that the third party
would rely on the financial statements.

 Whether the third party has sufficient proximity

 Whether they would have acted differently if the FS had shown a


different picture.

HOW TO REDUCE THE RISK OF BECOMING LIABLE??


(CARQILL)
 Client Screening
 Adhere to terms and conditions of the Engagement Letter
 Restrict the use of reports to their intended purposes
 Quality Control
 Insurance – Professional Indemnity Insurance
 Limited Liability Partnership
 Liability Cap with clients

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EXPECTATION GAP

This is the gap between what the public BELIEVES the auditors can do
and what the auditors ACTUALLY do.

HOW CAN WE NARROW THE GAP?


 Responsibilities of management and auditors in the Audit Report
 Responsibilities of management and auditors in the Engagement
Letters

 We should educate the intended users that we can only provide


Reasonable rather than Absolute assurance

 Use of disclaimers to reduce the amount of reliance users can


place on reports

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