This Australian Standard on Auditing (ASA) deals with the auditor’s responsibilities relating to fraud in an audit of a financial report and the implications for the auditor’s report. The requirements and guidance in this ASA refer to, or expand on, the application of other relevant ASAs, in particular ASA 200^[1], ASA 220^[2], ASA 315^[3], ASA 330^[4], and ASA 701^[5]. Accordingly, this ASA is intended to be applied in conjunction with other relevant ASAs.

Responsibilities of the Auditor

The auditor’s responsibilities relating to fraud when conducting an audit in accordance with this ASA, and other relevant ASAs, are to: (Ref: Para. A1)

a. 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. These responsibilities include identifying and assessing risks of material misstatement in the financial report due to fraud and designing and implementing responses to address those assessed risks.

b. Communicate and report about matters related to fraud.

Responsibilities of Management and Those Charged with Governance

The primary responsibility for the prevention and detection of fraud rests with both management and those charged with governance of the entity. It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This involves a commitment to creating and maintaining a culture of honesty and ethical behaviour that can be reinforced by active oversight by those charged with governance. Oversight by those charged with governance includes considering the potential for override of controls or other inappropriate influence over the financial reporting process, such as efforts by management to manipulate earnings in order to influence the perceptions of financial report users regarding the entity’s performance.

Characteristics of Fraud

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.

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

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.

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)

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

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]

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)

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.

Professional Scepticism and Professional Judgement

In accordance with ASA 200,^[9] the auditor is required to plan and perform the audit with professional scepticism and to exercise professional judgement. The auditor is required by this ASA to remain alert to the possibility that other audit procedures performed may bring information about fraud or suspected fraud to the auditor’s attention. Accordingly, it is important that the auditor maintain professional scepticism throughout the audit, considering the potential for management override of controls, and recognising that audit procedures that are effective for detecting error may not be effective in detecting fraud.

Professional judgement is exercised in making informed decisions about the courses of action that are appropriate in the circumstances, including when the auditor identifies fraud or suspected fraud. Professional scepticism supports the quality of judgements made by the engagement team and, through these judgements, supports the overall effectiveness of the engagement team in achieving quality at the engagement level. (Ref: Para. A13–A14)

Non-Compliance with Laws and Regulations

For the purposes of this and other relevant ASAs, fraud ordinarily constitutes an instance of non-compliance with laws and regulations. As such, if the auditor identifies fraud or suspected fraud, the auditor also has responsibilities in accordance with ASA 250.^[10] (Ref: Para. A15–A17)

Some ASAs that address specific topics also have requirements and guidance that are applicable to the auditor’s work on the identification and assessment of the risks of material misstatement due to fraud and responses to address such assessed risks of material misstatement due to fraud. In these instances, the other ASAs expand on how this ASA is applied. (Ref: Para. A18)

[Deleted by the AUASB. Refer Aus 0.3]