Key Concepts in this ASAKey Concepts in this ASA

Key Concepts in this ASA

Characteristics of Fraud

1. Misstatements in the financial report can arise from either fraud or error. The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial report is intentional or unintentional.
2. Two types of intentional misstatements are relevant to the auditor – misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets. (Ref: Para. A2–A6)

Fraud or Suspected Fraud

1. Although fraud is a broad legal concept, for the purposes of the ASAs, the auditor is concerned with a material misstatement of the financial report due to fraud. Although the auditor may identify or suspect the occurrence of fraud as defined by this ASA, the auditor does not make legal determinations of whether fraud has actually occurred.
2. The auditor may identify fraud or suspected fraud when performing audit procedures in accordance with this and other ASAs. Suspected fraud includes allegations of fraud that come to the auditor’s attention during the course of the audit. (Ref: Para. A7–A10 and A28)
3. The auditor’s determination of whether a fraud or suspected fraud is material to the financial report involves the exercise of professional judgement. For identified misstatement(s) due to fraud, this includes consideration of the nature of the circumstances giving rise to the fraud. Judgements about materiality involve both qualitative and quantitative considerations. (Ref: Para. A11)

Inherent Limitations

1. While the risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error, that does not diminish the auditor’s responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement due to fraud. Reasonable assurance is a high, but not absolute, level of assurance.[6]
2. Because of the significance of the inherent limitations of an audit as it relates to fraud, there is an unavoidable risk that some material misstatements of the financial report may not be detected, even though the audit is properly planned and performed in accordance with the ASAs.[7] However, the inherent limitations of an audit are not a justification for the auditor to be satisfied with less than persuasive audit evidence.[8] (Ref: Para. A12)
3. Furthermore, the risk of the 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 controls designed to prevent similar frauds by other employees.