PSA 240 (Redrafted): Furthermore, the risk of the auditor not

detecting a material misstatement resulting

The Auditor’s from management fraud is greater than for
employee fraud, because management is
Responsibilities frequently in a position to directly or
indirectly:
Relating to Fraud in
 manipulate accounting records
an Audit of Financial  present fraudulent financial
information or
Statements  override control procedures designed
to prevent similar frauds by other
Misstatements in the Financial Statements employees
can arise from:
Procedures that are effective for detecting
 Fraud (intentional misstatements) error may not be effective in detecting fraud.
o Fraudulent Financial Reporting
(Management Fraud) The objectives of the auditor are:
o Misstatements Resulting from
Misappropriation of Assets a. To identify and assess the risks of
(Employee Fraud) material misstatement of the financial
 Error (unintentional misstatements) statements due to fraud
b. To obtain sufficient appropriate audit
Responsibility for the Prevention and evidence about the assessed risks of
Detection of Fraud rests with both those material misstatement due to fraud,
charged with governance of the entity and through designing and implementing
management. appropriate responses; and
c. To respond appropriately to identified
There is an unavoidable risk that some or suspected fraud
material misstatements of the financial
statements will not be detected, even though Requirements
the audit is properly planned and performed
in accordance with the PSAs. Professional Skepticism

The risk of not detecting a material The auditor shall maintain an attitude of
misstatement resulting from fraud is higher professional skepticism throughout the audit,
than the risk of not detecting one resulting recognizing the possibility that a material
from error. misstatement due to fraud could exist.

The auditor’s ability to detect a fraud Unless the auditor has reason to believe the
depends on factors such as: contrary, the auditor may accept records and
documents as genuine and if the auditor
 The skillfulness of the perpetrator cause to believe that a document may not be
 The frequency and extent of authentic or that terms in a document have
manipulation been modified but not disclosed to the
 The degree of collusion involved auditor, the auditor shall investigate further.
 The relative size of individual amounts
manipulated Where responses to inquiries of management
 The seniority of those individuals or those charged with governance are
involved inconsistent, the auditor shall investigate the
inconsistencies.
Discussion Among the Engagement The auditor shall make inquiries of
Team management, those charged with
governance, others within the entity, and
PSA 315 requires a discussion among the internal audit to know if they have
engagement team members and a knowledge of any actual, suspected, or
determination by the engagement partner of alleged fraud affecting the entity, and to
which matters are to be communicated to obtain internal audit’s view about the risks of
those team members not involved in the fraud.
discussion.
Those Charged with Governance
 This discussion shall place particular
emphasis on how and where the The auditor shall obtain an understanding of
entity’s financial statements may be how those charged with governance exercise
susceptible to material misstatement oversight of management’s processes for
due to fraud, including how fraud identifying and responding to the risks of
might occur. fraud in the entity and the internal control
that management has established to
Risk Assessment Procedures and mitigate these risks.
Related Activities

When performing risk assessment

procedures and related activities to obtain an Unusual or Unexpected Relationships
understanding of the entity and its Identified
environment, including the entity’s internal
The auditor shall evaluate whether unusual
control, required by ISA 315, the auditor shall
or unexpected relationships that have been
perform the procedures below to obtain
identified in performing analytical
information for use in identifying the risks of
procedures, including those related to
material misstatement due to fraud.
revenue accounts, may indicate risks of
Management and Others within the material misstatement due to fraud.
Entity
Evaluation of Fraud Risk Factors
The auditor shall make inquiries of
The auditor shall evaluate the information
management regarding:
obtained from other RAP and related
a. The nature, extent, and frequency of activities performed whether one or more
the management’s assessment of the fraud risk factors are present.
risk that the FSs is materially
Also, auditor shall consider other information
misstated due to fraud
obtained by her indicates risks of material
b. Management’s process for identifying
misstatement due to fraud.
and responding to the identified risks
or that have been brought to its
attention.
Identification and Assessment
c. Management’s communication to of the Risks of Material
those charged with governance of its Misstatement Due to Fraud
process for identifying and responding
to the risks of fraud Auditor shall identify and assess the risks of
d. Management’s communication to material misstatements due to fraud at
employees regarding its views on FINANCIAL STATEMENT AND ASSERTION
business practices and ethical LEVEL
behavior
Responses to the Assessed Risks of designing and performing audit
Material Misstatement Due to Fraud procedures for such tests, the auditor
shall:
Overall Responses i. Make inquiries of individuals
involved in the financial
The auditor shall determine overall reporting process about
responses to address the assessed risks of inappropriate or unusual activity
material misstatement due to fraud at the ii. Select journal entries and other
FINANCIAL STATEMENT LEVEL adjustments made at the end of
a reporting period
To determine overall responses, the auditor iii. Consider the need to test
shall: journal entries and other
adjustments throughout the
 Assign and supervise personnel taking period
account of the knowledge, skill, and b. Review accounting estimates for
ability of the individuals given biases and if there is bias, check for
significant engagement responsibilities risk of material misstatement due to
and the auditor’s assessment of the fraud. In performing this, the auditor
risks of material misstatement due to shall:
fraud for the engagement. i. Evaluate whether judgments
 Evaluate whether the selection and and decisions made in making
application of accounting policies by the accounting estimates
the entity may be indicative of indicate a possible bias that
fraudulent financial reporting resulting represents fraud. If so, the
from management’s effort to manage auditor shall reevaluate the
earnings accounting estimates taken as a
 Incorporate an element of whole; and
unpredictability in the selection of the ii. Perform a retrospective review
nature, timing and extent of audit of management judgments and
procedures. assumptions related to
significant accounting estimates
Audit Procedures Responsive to
reflected in the financial
Assessed Risks of Material
statements of the prior year
Misstatement Due to Fraud at the
c. For significant transactions that are
Assertion Level
outside the normal course of business
for the entity, or that otherwise appear
The auditor shall design and perform further
to be unusual given the auditor’s
audit procedures whose nature, timing and
understanding of the entity and its
extent are responsive to the assessed risks
environment, the auditor shall
of material misstatement due to fraud at the
evaluate whether the business
ASSERTION LEVEL.
rationale (or the lack thereof) of the
Audit Procedures Responsive to Risks transactions suggests that they may
Related to Management Override of have been entered into to engage in
Controls fraudulent financial reporting or to
conceal misappropriation of assets.
Irrespective of the auditor’s assessment of
the risks of management override of Evaluation of Audit Evidence
controls, the auditor shall design and
perform audit procedures to:

a. Test the appropriateness of journal

entries in the general ledger. In
The auditor shall evaluate whether analytical engagement and the reasons
procedures that are performed when forming for the withdrawal
an overall conclusion indicate a previously o Determine whether there is a
unrecognized risk of material misstatement professional or legal
due to fraud. requirement to report to the
person or persons who made
When the auditor identifies a misstatement, the audit appointment or, in
the auditor shall evaluate whether such a some cases, to regulatory
misstatement is indicative of fraud. authorities

 If there is such an indication, the Management Representations

auditor shall evaluate the implications
of the misstatement in relation to The auditor shall obtain written
other aspects of the audit. representations from management that:

If the auditor identifies a misstatement, a. acknowledges its responsibility for the

whether material or not, and the auditor has design, implementation and
reason to believe that it is or may be the maintenance of internal control to
result of fraud and that management (in prevent and detect fraud
particular, senior management) is involved, b. has disclosed to the auditor the results
the auditor shall reevaluate the assessment of its assessment of the risk that the
of the risks of material misstatement due to financial statements may be materially
fraud and its resulting impact on the nature, misstated as a result of fraud
timing and extent of audit procedures to c. has disclosed to the auditor its
respond to the assessed risks. knowledge of fraud or suspected fraud
affecting the entity involving:
 When the auditor confirms that, or is i. Management
unable to conclude whether, the ii. Employees who have significant
financial statements are materially roles in internal control
misstated as a result of fraud the iii. Others where the fraud could
auditor shall evaluate the implications have a material effect on the
(result) for the audit. financial statements; and
d. Has disclosed to the auditor its
Auditor Unable to Continue the Engagement
knowledge of any allegations of fraud,
or suspected fraud, affecting the
If because of a misstatement resulting from
entity’s financial statements
fraud or suspected fraud that bring into
communicated by employees, former
question the auditor’s ability to continue
employees, analysts, regulators or
performing the audit, the auditor shall:
others.
 Determine the professional and legal
responsibilities applicable in the Communications to Management
circumstances. and With Those Charged with
 Consider whether it is appropriate to Governance
withdraw from the engagement, where
withdrawal from the engagement is If the auditor has identified fraud, the auditor
legally permitted; and shall communicate these matters on a timely
 If the auditor withdraws basis to the appropriate level of
o Discuss with the appropriate management.
level of management and those
If the auditor suspects fraud involving
charged with governance the
management, the auditor shall communicate
auditor’s withdrawal from the
these suspicions to those charged with
governance and discuss with them the circumstances of the engagement, the
nature, timing and extent of audit procedures auditor shall document the reasons for that
necessary to complete the audit. conclusion.

Communications to Regulatory and Application and Other

Enforcement Authorities Explanatory Material
If the auditor has identified or suspects a Fraudulent financial reporting may be
fraud, the auditor shall determine whether accomplished by the following:
there is a responsibility to report the
occurrence or suspicion to a party outside  Manipulation, falsification (including
the entity. forgery), or alteration of accounting
records or supporting documentation
Documentation from which the financial statements
are prepared.
The auditor’s documentation of the  Misrepresentation in, or intentional
understanding of the entity and its omission from, the financial
environment and the assessment of the risks statements of events, transactions or
of material misstatement required by ISA 315 other significant information.
shall include:  Intentional misapplication of
accounting principles relating to
a. Significant decision reached among
amounts, classification, manner of
the engagement team regarding the
presentation, or disclosure.
susceptibility of the entity to material
misstatement due to fraud; and Fraud can be committed by management
b. The identified and assessed risks of overriding controls using such techniques as:
material misstatement due to fraud at
the financial statement level and at  Recording fictitious journal entries,
the assertion level. particularly close to the end of an
accounting period, to manipulate
The auditor’s documentation of the operating results or achieve other
responses to the assessed risks of material objectives.
misstatement required by PSA 330 shall  Inappropriately adjusting assumptions
include: and changing judgments used to
estimate account balances.
a. The overall responses to the assessed
 Omitting, advancing or delaying
risks of material misstatement due to
recognition in the financial statements
fraud at FINANCIAL STATEMENT and
of events and transactions that have
ASSERTION LEVEL
occurred during the reporting period.
b. The results of the audit procedures,
 Concealing, or not disclosing, facts
including those designed to address
that could affect the amounts recorded
the risk of management override of
in the financial statements.
controls.
 Engaging in complex transactions that
The auditor shall document communications are structured to misrepresent the
about fraud made to management, those financial position or financial
charged with governance, regulators and performance of the entity.
others.  Altering records and terms related to
significant and unusual transactions.
When the auditor has concluded that the
presumption that there is a risk of material Misappropriation of assets can be
misstatement due to fraud related to accomplished in a variety of ways including:
revenue recognition is not applicable in the
  Embezzling receipts  Consideration of fraud risk factors
 Stealing physical assets or intellectual (incentive or pressure for
property management to commit fraud)
 Causing an entity to pay for goods or  Consideration of management’s
services not received involvement in overseeing employees
 Using an entity’s assets for personal with access to cash or other assets
use susceptible to misappropriation.
 Consideration of any unusual or
Professional Skepticism unexplained changes in behavior of
management or employees which
As explained in PSA 200, an audit performed have come to the attention of the
in accordance with PSAs rarely involves the engagement team.
authentication of documents, nor is the  Emphasis on the importance of
auditor trained as or expected to be an maintaining a proper state of mind
expert in such authentication. However, throughout the audit
when the auditor identifies conditions that  Consideration of the types of
cause the auditor to believe that a document circumstances that, if encountered,
may not be authentic or that terms in a might indicate the possibility of fraud.
document have been modified but not  Consideration of how an element of
disclosed to the auditor, possible procedures unpredictability will be incorporated
to investigate further may include: into the nature, timing and extent of
the audit procedures to be performed.
 Confirming directly with the third party  Consideration of the audit procedures
 Using the work of an expert to assess that might be selected to respond to
the document’s authenticity the susceptibility of the entity’s
financial statement to material
Discussion Among the Engagement misstatement due to fraud
Team  Consideration of any allegations of
fraud that have come to the auditor’s
 Share insights about how and where attention
the FSs may be susceptible to material  Consideration of the risk of
misstatement due to fraud management override of controls
 Consider an appropriate response and
determine which member will conduct Risk Assessment Procedures and
certain audit procedures
Related Activities
 How the results of audit procedures
will be shared among the engagement The nature, extent and frequency of
team and how to deal with any management’s assessment are relevant to
allegations of fraud the auditor’s understanding of the entity’s
control environment.
The discussion may include such matters as:
Examples of others within the entity to whom
 Exchange of ideas about how and
the auditor may direct inquiries about the
where in the FSs may be susceptible
existence or suspicion of fraud include:
to material misstatement due to fraud,
how management could perpetrate  Operating personnel not directly
and conceal fraudulent financial involved in the financial reporting
reporting, and how assets of the entity process.
could be misappropriated  Employees with different levels of
 Consideration of management authority.
managing earnings that could lead to  Employees involved in initiating,
fraudulent financial reporting processing or recording complex or
 unusual transactions and those who with registered or listed securities; grantees
supervise or monitor such employees. of permits/licenses and secondary franchises
 In-house legal counsel. from the SEC; and public companies.
 Chief ethics officer or equivalent
person. Also, the Bangko Sentral ng Pilipinas (BSP)
 The person or persons charged with requires banks to create audit committees
dealing with allegations of fraud. that will be responsible for the set-up of the
banks’ internal audit functions.
The auditor may inquire about specific
internal audit activities including, for Domination of management by a single
example: individual can be a potential weakness since
there is an opportunity for management
 The procedures performed, if any, by override of controls.
the internal auditors during the year to
detect fraud. Identification and Assessment of the
 Whether management has Risks of Material Misstatement Due
satisfactorily responded to any to Fraud
findings resulting from those
procedures. Risks of Fraud in Revenue Recognition

An understanding of the oversight exercised There may be pressures or incentives on

by those charged with governance may management to commit fraudulent financial
provide insights regarding the susceptibility reporting through inappropriate revenue
of the entity to management fraud, the recognition in the case of listed entities
adequacy of internal control over risks of when, for example, performance is measured
fraud, and the competency and integrity of in terms of year-over-year revenue growth or
management. The auditor may obtain this profit.
understanding in a number of ways, such as:
The presumption that there are risks of fraud
 by attending meetings where such in revenue recognition may be rebutted. For
discussions take place example, the auditor may conclude that
 reading the minutes from such there is no risk of material misstatement due
meetings; or to fraud relating to revenue recognition in
 making inquiries of those charged with the case where a there is a single type of
governance simple revenue transaction, for example,
leasehold revenue from a single unit rental
In some cases, all of those charged with property.
governance are involved in managing the
entity. This may be the case in a small entity Responses to the Assessed Risks of
where a single owner manages the entity Material Misstatement Due to Fraud
and no one else has a governance role.
Determining overall responses to address the
 In these cases, there is ordinarily NO assessed risks of material misstatement due
ACTION on the part of the auditor to fraud generally includes the consideration
because there is no oversight separate of how the overall conduct of the audit can
from management. reflect increased professional skepticism, for
example, through:
In the Philippines, the Securities and
Exchange Commission (SEC) promulgates  Increased sensitivity in the selection of
and implements the “Code of Corporate the nature and extent of
Governance” that requires the establishment documentation to be examined in
of corporate governance policies and support of material transactions.
practices of the following entities: entities
  Increased recognition of the need to  Timing of substantive procedures may
corroborate management explanations need to be modified. Auditor may
or representations concerning material conclude that performing substantive
matters. testing at or near the period end
better addresses an assessed risk of
Unpredictability in the Selection of material misstatement due to fraud
Audit Procedures  Extent of the procedures applied
reflect the assessment of the risks of
Incorporating an element of unpredictability material misstatement due to fraud
in the selection of the nature, timing and
extent of audit procedures to be performed is If the auditor identifies a risk of material
important as individuals within the entity misstatement due to fraud that affects
who are familiar with the audit procedures inventory quantities, examining the entity’s
normally performed on engagements may be inventory records may help to identify
more able to conceal fraudulent financial locations or items that require specific
reporting. This can be achieved by, for attention during or after the physical
example: inventory count.

 Performing substantive procedures on The auditor may identify a risk of material

selected account balances and misstatement due to fraud affecting a
assertions not otherwise tested due to number of accounts and assertions. These
their materiality or risk. may include asset valuation, estimates
 Adjusting the timing of audit relating to specific transactions (such as
procedures from that otherwise acquisitions, restructurings, or disposals of a
expected. segment of the business), and other
 Using different sampling methods. significant accrued liabilities (such as
 Performing audit procedures at pension and other post-employment benefit
different locations or at locations on an obligations, or environmental remediation
unannounced basis. liabilities).

Audit Procedures Responsive to

Assessed Risks of Material
Misstatement Due to Fraud at the
Assertion Level

The auditor’s responses to address the

assessed risks of material misstatement due
to fraud at the assertion level may include
changing the nature, timing, and extent of
audit procedures in the following ways:

The nature of audit procedures to be

performed may need to be changed to obtain
audit evidence that is more reliable and
relevant or to obtain additional corroborative
information. For example:

 Physical observation or inspection of

certain assets
 Auditor may design procedures to
obtain additional corroborative
information
Audit Procedures Responsive to Risks
Related to Management Override of
Controls

When identifying and selecting journal

entries and other adjustments for testing and
determining the appropriate method of
examining the underlying support for the
items selected, the following matters are of
relevance: