The Auditors Responsibilities Regarding Fraud

Fraud is an intentional act by an individual or management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unfair or unlawful advantage.

 

The auditor is responsible for assessing material misstatements in the financial statements due to fraud, by obtaining sufficient appropriate audit evidence through the design and implementation of appropriate responses, and responding to fraud or suspected fraud identified during the audit.

 

In addition, the auditor should evaluate whether risk assessment procedures and other information or unusual or unexpected relationships that have been identified may indicate a risk of material misstatement due to fraud.

 

The risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting a material misstatement due to error, because fraud may employ sophisticated and carefully organized schemes designed to cover it up, such as fraud, deliberately failing to record transactions, or intentional misrepresentation to the auditor. Such concealment efforts will be more difficult to detect if accompanied by collusion that can cause the auditor to believe that the audit evidence is convincing even though the evidence is in fact false.
 

The auditor's ability to detect fraud depends on factors such as the proficiency of the perpetrator, the frequency and extent of manipulation, the degree of collusion involvement, the relative size of the number of individuals manipulated, and the seniority of the individuals involved. Therefore, the auditor must maintain professional skepticism throughout the audit, the auditor must inquire from management regarding management's assessment of risk, management's processes, and management's communications on governance to identify errors or fraud within the entity. The auditor should also obtain an understanding of how those charged with governance exercise oversight of the processes applied by management in identifying and responding to fraud within the entity and the internal controls that have been implemented by management.

 

The auditor must communicate to those charged with corporate governance about other matters relating to fraud. If the auditor has identified or suspected fraud, the auditor shall determine whether it is the auditor's responsibility to report the incident or suspicion to parties outside the entity. In addition, the auditor must also include in the audit documentation any fraud that has been committed with management, those charged with governance, regulatory bodies, and other parties.

 

There are risk factors associated with misstatements due to fraud or errors and asset abuse, such as intensive/pressure, opportunity and attitude/rationalization. Examples of conditions that indicate the possibility of fraud, include conflicting or missing evidence, problematic or unusual relationships between the auditor and management, accounting policies that appear to differ from industry standards, etc.

 

The auditor must maintain an independent attitude in conducting the audit and when providing the results of the audit report to the client. The main responsibility of the auditor is not only on the client (second party) but also third parties or parties with an interest in the financial statements such as shareholders, potential investors, the government, and other interested parties. If the auditor does not have an independent attitude, competence, and responsibility in examining the financial statements of a company, it will result in fraud. Which fraud can be said to be an audit failure.

 

The attitude of an auditor's responsibility in examining financial statements is to provide an opinion on the fairness of financial reporting, especially in the presentation of financial position and results of operations in a period. The auditor also assesses whether the entity's financial statements are presented in accordance with generally accepted accounting principles, applied consistently from period to period, and so on. If the auditor finds that the financial statements are not presented in accordance with generally accepted accounting principles or finds fraud in the financial statements, the auditor is responsible for reporting the findings. Otherwise the auditor will result in audit failure. Audit failure can also be caused by a lack of relevant information which causes a weak fraud detection responsibility by an auditor. The existence of irrelevant information mixed with relevant information will result in the auditor's assessment of fraud risk being less good.

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