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Consideration of Fraud in a Financial Statement Audit - AICPA

Consideration of Fraud in a Financial Statement Audit163AU-C Section 240 Consideration of Fraud in a FinancialStatement AuditSource: SAS No. 122; SAS No. 128; SAS No. 134; SAS No. 135; SASNo. for audits of Financial statements for periods ending on orafter December 15, 2012, unless otherwise July 2020, the Auditing Standards Board issued Statement on AuditingStandards No. 143,Auditing Accounting Estimates and Related Disclosures,which contains amendments to this amendments are effective for audits of Financial statements for periodsending on or after December 15, 2023, and can be viewed in appendix C ofsection 540 until the effective date, when they will be applied to this of This section addresses the auditor's responsibilities relating to fraudin an Audit of Financial statements. Specifically, it expands on how section 315,Understanding the Entity and Its Environment and Assessing the Risks of Ma-terial Misstatement, and section 330,Performing Audit Procedures in Responseto Assessed Risks and Evaluating the Audit Evidence Obtained, are to be ap-plied regarding risks of material misstatement due to of in the Financial statements can arise from either fraudor error.

Consideration of Fraud in a Financial Statement Audit 163 AU-CSection240 Consideration of Fraud in a Financial Statement Audit Source: SAS No. 122; SAS No. 128; SAS No. 134; SAS No. 135; SAS No.136. Effective for audits of financial statements for periods ending on or afterDecember15,2012,unlessotherwiseindicated. NOTE

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Transcription of Consideration of Fraud in a Financial Statement Audit - AICPA

1 Consideration of Fraud in a Financial Statement Audit163AU-C Section 240 Consideration of Fraud in a FinancialStatement AuditSource: SAS No. 122; SAS No. 128; SAS No. 134; SAS No. 135; SASNo. for audits of Financial statements for periods ending on orafter December 15, 2012, unless otherwise July 2020, the Auditing Standards Board issued Statement on AuditingStandards No. 143,Auditing Accounting Estimates and Related Disclosures,which contains amendments to this amendments are effective for audits of Financial statements for periodsending on or after December 15, 2023, and can be viewed in appendix C ofsection 540 until the effective date, when they will be applied to this of This section addresses the auditor's responsibilities relating to fraudin an Audit of Financial statements. Specifically, it expands on how section 315,Understanding the Entity and Its Environment and Assessing the Risks of Ma-terial Misstatement, and section 330,Performing Audit Procedures in Responseto Assessed Risks and Evaluating the Audit Evidence Obtained, are to be ap-plied regarding risks of material misstatement due to of in the Financial statements can arise from either fraudor error.

2 The distinguishing factor between Fraud and error is whether the un-derlying action that results in the misstatement of the Financial statements isintentional or Fraud is a broad legal concept, for the purposes of generallyaccepted auditing standards (GAAS), the auditor is primarily concerned withfraud that causes a material misstatement in the Financial statements. Twotypes of intentional misstatements are relevant to the auditor misstate-ments resulting from fraudulent Financial reporting and misstatements result-ing from misappropriation of assets. Although the auditor may suspect or, inrare cases, identify the occurrence of Fraud , the auditor does not make legaldeterminations of whether Fraud has actually occurred. (Ref: par..A1 .A8)Responsibility for the Prevention and Detection of primary responsibility for the prevention and detection of fraudrests with both those charged with governance of the entity and management.

3 2021, AICPAAU-C Principles and ResponsibilitiesIt is important that management, with the oversight of those charged with gov-ernance, places a strong emphasis on Fraud prevention, which may reduce op-portunities for Fraud to take place, and Fraud deterrence, which could persuadeindividuals not to commit Fraud because of the likelihood of detection and pun-ishment. This involves a commitment to creating a culture of honesty and ethi-cal behavior, which can be reinforced by active oversight by those charged withgovernance. Oversight by those charged with governance includes consideringthe potential for override of controls or other inappropriate influence over thefinancial reporting process, such as efforts by management to manage earningsin order to influence the perceptions of Financial Statement users regarding theentity's performance and of the auditor conducting an Audit in accordance with GAAS is responsi-ble for obtaining reasonable assurance that the Financial statements as a wholeare free from material misstatement, whether caused by Fraud or error.

4 Dueto the inherent limitations of an Audit , an unavoidable risk exists that somematerial misstatements of the Financial statements may not be detected, eventhough the Audit is properly planned and performed in accordance with described in section 200,Overall Objectives of the Independent Au-ditor and the Conduct of an Audit in Accordance With Generally Accepted Au-diting Standards, the potential effects of inherent limitations are particularlysignificant in the case of misstatement resulting from a material misstatement resulting from Fraud is higher than the riskof not detecting one resulting from error. This is because Fraud may involvesophisticated and carefully organized schemes designed to conceal it, such asforgery, deliberate failure to record transactions, or intentional misrepresenta-tions being made to the auditor. Such attempts at concealment may be evenmore difficult to detect when accompanied by collusion.

5 Collusion may causethe auditor to believe that Audit evidence is persuasive when it is, in fact, auditor's ability to detect a Fraud depends on factors such as the skillful-ness of the perpetrator, the frequency and extent of manipulation, the degreeof collusion involved, the relative size of individual amounts manipulated, andthe seniority of those individuals involved. Although the auditor may be ableto identify potential opportunities for Fraud to be perpetrated, it is difficult forthe auditor to determine whether misstatements in judgment areas, such asaccounting estimates, are caused by Fraud or , the risk of the auditor not detecting a material misstate-ment resulting from management Fraud is greater than for employee Fraud be-cause management is frequently in a position to directly or indirectly manip-ulate accounting records, present fraudulent Financial information, or overridecontrol procedures designed to prevent similar frauds by other obtaining reasonable assurance, the auditor is responsible formaintaining professional skepticism throughout the Audit , considering the po-tential for management override of controls, and recognizing the fact that au-dit procedures that are effective for detecting error may not be effective indetecting Fraud .

6 The requirements in this section are designed to assist theauditor in identifying and assessing the risks of material misstatement due tofraud and in designing procedures to detect such .A55 .A56 of section 200,Overall Objectives of the Independent Auditor and theConduct of an Audit in Accordance With Generally Accepted Auditing .A55 of section 2021, AICPAC onsideration of Fraud in a Financial Statement Audit165 Effective section is effective for audits of Financial statements for periodsending on or after December 15, objectives of the auditor are and assess the risks of material misstatement of the fi-nancial statements due to Fraud ; sufficient appropriate Audit evidence regarding the as-sessed risks of material misstatement due to Fraud , through de-signing and implementing appropriate responses; appropriately to Fraud or suspected Fraud identified dur-ing the purposes of GAAS, the following terms have the meanings at-tributed as intentional act by one or more individuals among man-agement, those charged with governance, employees, or third par-ties, involving the use of deception that results in a misstatementin Financial statements that are the subject of an or conditions that indicate an incentiveor pressure to perpetrate Fraud , provide an opportunity to commitfraud, or indicate attitudes or rationalizations to justify a Fraud -ulent action.

7 (Ref: par..A11, .A30, and .A57)Significant unusual transactions thatare outside the normal course of business for the entity or thatotherwise appear to be unusual due to their timing, size, ornature.[As amended, effective for audits of Financial statements for periods ending onor after December 15, 2021, by SAS No. 135.]RequirementsProfessional accordance with section 200, the auditor should maintain profes-sional skepticism throughout the Audit , recognizing the possibility that a ma-terial misstatement due to Fraud could exist, notwithstanding the auditor's pastexperience of the honesty and integrity of the entity's management and thosecharged with (Ref: par..A9 .A10).13 Unless the auditor has reason to believe the contrary, the auditor mayaccept records and documents as genuine. If conditions identified during theaudit cause the auditor to believe that a document may not be authentic orthat terms in a document have been modified but not disclosed to the auditor,the auditor should investigate further.

8 (Ref: par..A11)3 Paragraph .17 of section 200. 2021, AICPAAU-C Principles and responses to inquiries of management, those charged with gov-ernance, or others are inconsistent or otherwise unsatisfactory (for example,vague or implausible), the auditor should further investigate the inconsisten-cies or unsatisfactory Among the Engagement 315 requires a discussion among the key engagement teammembers, including the engagement partner, and a determination by the en-gagement partner of which matters are to be communicated to those teammembers not involved in the discussion should include anexchange of ideas or brainstorming among the engagement team membersabout how and where the entity's Financial statements (including the individualstatements and the disclosures) might be susceptible to material misstatementdue to Fraud , how management could perpetrate and conceal fraudulent finan-cial reporting, and how assets of the entity could be misappropriated.

9 The dis-cussion should occur setting aside beliefs that the engagement team membersmay have that management and those charged with governance are honest andhave integrity, and should, in particular, also address (Ref: par..A12 .A13) external and internal factors affecting the entity that maycreate an incentive or pressure for management or others to com-mit Fraud , provide the opportunity for Fraud to be perpetrated,and indicate a culture or environment that enables managementor others to rationalize committing Fraud ; risk of management override of controls; of circumstances that might be indicative of earn-ings management or manipulation of other Financial measuresand the practices that might be followed by management to man-age earnings or other Financial measures that could lead to Fraud -ulent Financial reporting; importance of maintaining professional skepticism through-out the Audit regarding the potential for material misstatementduetofraud.

10 The auditor might respond to the susceptibility of the entity'sfinancial statements to material misstatement due to among the engagement team members about the risks of ma-terial misstatement due to Fraud should continue throughout the Audit , partic-ularly upon discovery of new facts during the Audit . [As amended, effective foraudits of Financial statements for periods ending on or after December 15, 2021,by SAS No. 134.]Risk Assessment Procedures and Related performing risk assessment procedures and related activitiesto obtain an understanding of the entity and its environment, including theentity's internal control, required by section 315, the auditor should perform theprocedures in paragraphs .17 .24 to obtain information for use in identifyingthe risks of material misstatement due to .11 of section 315,Understanding the Entity and Its Environment and Assessing theRisks of Material .05 .25 of section 2021, AICPAC onsideration of Fraud in a Financial Statement Audit167 Discussions With Management and Others Within the auditor should make inquiries of management 's assessment of the risk that the Financial state-ments may be materially misstated due to Fraud , including the na-ture, extent, and frequency of such assessments; (Ref: par.)


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