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    The auditor faces a greater risk of not detecting material misstatements due to management fraud compared to employee fraud, as management can manipulate accounting records and financial information. When obtaining reasonable assurance, auditors must maintain professional skepticism regarding potential management override of controls. They must also recognize that procedures effective for detecting errors may not detect fraud. Auditing standards require engagement teams to discuss matters susceptible to material misstatements due to fraud, with an emphasis on how and where financial statements could be fraudulently misstated. Risk assessment procedures include inquiries of management and others about fraud risks and controls, as well as evaluating whether fraud risk factors are present. In response, auditors determine overall responses to address financial statement-level fraud risks, and design procedures at

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    Course Hero 7

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    The auditor faces a greater risk of not detecting material misstatements due to management fraud compared to employee fraud, as management can manipulate accounting records and financial information. When obtaining reasonable assurance, auditors must maintain professional skepticism regarding potential management override of controls. They must also recognize that procedures effective for detecting errors may not detect fraud. Auditing standards require engagement teams to discuss matters susceptible to material misstatements due to fraud, with an emphasis on how and where financial statements could be fraudulently misstated. Risk assessment procedures include inquiries of management and others about fraud risks and controls, as well as evaluating whether fraud risk factors are present. In response, auditors determine overall responses to address financial statement-level fraud risks, and design procedures at

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    The auditor faces a greater risk of not detecting material misstatements due to management fraud compared to employee fraud, as management can manipulate accounting records and financial information. When obtaining reasonable assurance, auditors must maintain professional skepticism regarding potential management override of controls. They must also recognize that procedures effective for detecting errors may not detect fraud. Auditing standards require engagement teams to discuss matters susceptible to material misstatements due to fraud, with an emphasis on how and where financial statements could be fraudulently misstated. Risk assessment procedures include inquiries of management and others about fraud risks and controls, as well as evaluating whether fraud risk factors are present. In response, auditors determine overall responses to address financial statement-level fraud risks, and design procedures at

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    830 views2 pages

    Course Hero 7

    Uploaded by

    nhb
    The auditor faces a greater risk of not detecting material misstatements due to management fraud compared to employee fraud, as management can manipulate accounting records and financial information. When obtaining reasonable assurance, auditors must maintain professional skepticism regarding potential management override of controls. They must also recognize that procedures effective for detecting errors may not detect fraud. Auditing standards require engagement teams to discuss matters susceptible to material misstatements due to fraud, with an emphasis on how and where financial statements could be fraudulently misstated. Risk assessment procedures include inquiries of management and others about fraud risks and controls, as well as evaluating whether fraud risk factors are present. In response, auditors determine overall responses to address financial statement-level fraud risks, and design procedures at

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    1.

    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 and present fraudulent financial information or override control procedures designed to prevent similar
    frauds by other employees.

    2. When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of professional
    skepticism throughout the audit, considering the potential for management override of controls and recognizing
    the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.

    3. PSA 315 requires discussion among the engagement team members and a determination by the engagement
    partner of which matters are to be communicated to those team members not involved in the discussion. This
    discussion shall place particular emphasis on how and where the entity’s financial statements may be
    susceptible to material misstatements due to fraud, including how fraud might occur.

    Risk Assessment Procedure and Related Activities

    1. The auditor shall make inquiries of management regarding:


    a.) Management’s assessment of the risk that the financial statements may be materially misstated due to
    fraud, including the nature, extent and frequency of such assessments;
    b.) Management’s process for identifying and responding to the risks of fraud in the entity, including any
    specific risks fraud that management has identified or that have been brought to its attention, or classes
    of transactions, account balances, or disclosures for which a risk of fraud is likely to exist;
    c.) Management’s communication, if any, to those charged with governance regarding its processes for
    identifying and responding to the risks of fraud in the entity; and
    d.) Management’s communication, if any, to employees regarding its views on business practices and
    ethical behavior.

    2. The auditor shall make inquiries of management, and others within the entity as appropriate, to determine
    whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.

    3. The auditor shall obtain understanding of how those charged with governance exercise oversight of
    management’s process for identifying and responding to the risk of fraud in the entity and the internal control
    that management has established to mitigate these risks.

    4. The auditor shall evaluate whether the information obtained from the other risk assessment procedures and
    related activities performed indicates that one or more fraud risk factors are present.

    Responses to the Risk of Material Misstatement Due to Fraud

    1. The auditor shall determine overall responses to address the assessed risks of material misstatement due to
    fraud at the financial statement level and shall design and perform risks at the assertion level.
    2. In determining overall responses to address the risks of material misstatement due to fraud at the financial
    statement level the auditor shall:
    • Assign and supervise personnel taking account of the knowledge, skill and ability of the individuals
    to be given significant engagement responsibilities and the auditor’s assessment of the risks of
    material misstatement due to fraud of the engagement.
    • Evaluate whether the selection and application of accounting policies by the entity, particularly
    those related to subjective measurements and complex transactions, may be indicative of
    fraudulent financial reporting resulting from management’s effort to manage earnings; and
    • Incorporate an element of unpredictability in the selection of the nature, timing and extent of audit
    procedures.

    Audit Procedures Responsive to Risks of Material Misstatement Due to Fraud at the Assertion Level
    The auditor’s responses may include changing the nature, timing, and extent of audit procedures in the following
    ways:

    a.) The nature of audit procedures to be performed may need to be changed to obtain audit evidence that
    is more reliable and relevant to obtain additional corroborative information.
    b.) The timing of substantive may need to be modified. The auditor may conclude that performing
    substantive testing at or near the period end better addresses an assessed risk of material
    misstatement to fraud.
    c.) The extent of the procedures applied reflects the assessment of the risks of material misstatement due
    to fraud. For example, increasing sample sizes or performing analytical procedures at a more detailed
    level may be appropriated.

    3. To respond to the risk of management override of controls, the auditor shall design and perform audit
    procedures to:

    a.) Test the appropriateness of journal entries recorded in the general ledger and other adjudtments made
    in the preparation of financial statements;
    b.) Review accounting estimates for biases that could result in material misstatement due to fraud; and
    c.) Obtain an understanding of the business rationale of significant transactions that the auditor becomes
    aware of that are outside of the normal course of business for the entity, or that otherwise appear to be
    unusual given the auditor’s understanding of the entity and its environment.

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