In accordance with ASA 200[5], the auditor shall maintain professional scepticism throughout the audit, recognising the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with governance.  (Ref: Para. A8‑A9)

Unless the auditor has reason to believe the contrary, the auditor may accept records and documents as genuine.  If conditions identified during the audit cause the auditor to believe that a document may not be authentic or that terms in a document have been modified but not disclosed to the auditor, the auditor shall investigate further.  (Ref: Para. A10)

Where responses to enquiries of management or those charged with governance are inconsistent, the auditor shall investigate the inconsistencies. 

ASA 315 requires a 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^[6].  This discussion shall place particular emphasis on how and where the entity’s financial report may be susceptible to material misstatement due to fraud, including how fraud might occur.  The discussion shall occur setting aside beliefs that the engagement team members may have that management and those charged with governance are honest and have integrity.  (Ref: Para. A11‑A12)

When performing risk assessment procedures and related activities to obtain an understanding of the entity and its environment, including the entity’s internal control, required by ASA 315,^[7] the auditor shall perform the procedures in paragraphs 18‑25 of this Auditing Standard to obtain information for use in identifying the risks of material misstatement due to fraud.

Management and Others within the Entity

The auditor shall make enquiries of management regarding:

1. Management’s assessment of the risk that the financial report may be materially misstated due to fraud, including the nature, extent and frequency of such assessments;  (Ref: Para. A13‑A14)
2. Management’s process for identifying and responding to the risks of fraud in the entity, including any specific risks of 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;  (Ref: Para. A15)
3. 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
4. Management’s communication, if any, to employees regarding its views on business practices and ethical behaviour.

The auditor shall make enquiries 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.  (Ref: Para. A16‑A18)

For those entities that have an internal audit function, the auditor shall make enquiries of appropriate individuals within the function to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity, and to obtain its views about the risks of fraud.  (Ref: Para. A19)

Those Charged with Governance

Unless all of those charged with governance are involved in managing the entity,^[8] the auditor shall obtain an understanding of how those charged with governance exercise oversight of management’s processes for identifying and responding to the risks of fraud in the entity and the internal control that management has established to mitigate these risks.  (Ref: Para. A20‑A22)

Unless all of those charged with governance are involved in managing the entity, the auditor shall make enquiries of those charged with governance to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.  These enquiries are made in part to corroborate the responses to the enquiries of management.

Unusual or Unexpected Relationships Identified

The auditor shall evaluate whether unusual or unexpected relationships that have been identified in performing analytical procedures, including those related to revenue accounts, may indicate risks of material misstatement due to fraud.

Other Information

The auditor shall consider whether other information obtained by the auditor indicates risks of material misstatement due to fraud.  (Ref: Para. A23)

Evaluation of Fraud Risk Factors

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.  While fraud risk factors may not necessarily indicate the existence of fraud, they have often been present in circumstances where frauds have occurred and therefore may indicate risks of material misstatement due to fraud.  (Ref: Para. A24‑A28)

In accordance with ASA 315, the auditor shall identify and assess the risks of material misstatement due to fraud at the financial report level, and at the assertion level for classes of transactions, account balances and disclosures.^[9]

When identifying and assessing the risks of material misstatement due to fraud, the auditor shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of revenue, revenue transactions or assertions give rise to such risks.  Paragraph 48 of this Auditing Standard specifies the documentation required where the auditor concludes that the presumption is not applicable in the circumstances of the engagement and, accordingly, has not identified revenue recognition as a risk of material misstatement due to fraud.  (Ref: Para. A29‑A31)

The auditor shall treat those assessed risks of material misstatement due to fraud as significant risks and accordingly, to the extent not already done so, the auditor shall obtain an understanding of the entity’s related controls, including control activities, relevant to such risks.  (Ref: Para. A32‑A33)

Overall Responses

In accordance with ASA 330, the auditor shall determine overall responses to address the assessed risks of material misstatement due to fraud at the financial report level.^[10] (Ref: Para. A34)

In determining overall responses to address the assessed risks of material misstatement due to fraud at the financial report level, the auditor shall:

1. 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 for the engagement; (Ref: Para. A35‑A36)
2. 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
3. Incorporate an element of unpredictability in the selection of the nature, timing and extent of audit procedures.  (Ref: Para. A37)

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

In accordance with ASA 330, the auditor shall design and perform further audit procedures whose nature, timing and extent are responsive to the assessed risks of material misstatement due to fraud at the assertion level.^[11]  (Ref: Para. A38‑A41)

Audit Procedures Responsive to Risks Related to Management Override of Controls

Management is in a unique position to perpetrate fraud because of management’s ability to manipulate accounting records and prepare a fraudulent financial report by overriding controls that otherwise appear to be operating effectively.  Although the level of risk of management override of controls will vary from entity to entity, the risk is nevertheless present in all entities.  Due to the unpredictable way in which such override could occur, it is a risk of material misstatement due to fraud and thus a significant risk.

Irrespective of the auditor’s assessment of the risks of management override of controls, the auditor shall design and perform audit procedures to:

1. Test the appropriateness of journal entries recorded in the general ledger and other adjustments made in the preparation of the financial report.  In designing and performing audit procedures for such tests, the auditor shall:
   1. Make enquiries of individuals involved in the financial reporting process about inappropriate or unusual activity relating to the processing of journal entries and other adjustments;
   2. Select journal entries and other adjustments made at the end of a reporting period; and
   3. Consider the need to test journal entries and other adjustments throughout the period.  (Ref: Para. A42‑A45)
2. Review accounting estimates for biases and evaluate whether the circumstances producing the bias, if any, represent a risk of material misstatement due to fraud.  In performing this review, the auditor shall:
   1. Evaluate whether the judgements and decisions made by management in making the accounting estimates included in the financial report, even if they are individually reasonable, indicate a possible bias on the part of the entity’s management that may represent a risk of material misstatement due to fraud.  If so, the auditor shall re‑evaluate the accounting estimates taken as a whole; and
   2. Perform a retrospective review of management judgements and assumptions related to significant accounting estimates reflected in the financial report of the prior year.  (Ref: Para. A46‑A48)
3. For significant transactions that are outside 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 and other information obtained during the audit, evaluate whether the business rationale (or the lack thereof) of the transactions suggests that they may have been entered into to engage in fraudulent financial reporting or to conceal misappropriation of assets.  (Ref: Para. A49)

The auditor shall determine whether, in order to respond to the identified risks of management override of controls, the auditor needs to perform other audit procedures in addition to those specifically referred to above (that is, where there are specific additional risks of management override that are not covered as part of the procedures performed to address the requirements in paragraph 33 of this Auditing Standard). 

(Ref: Para. A50)

The auditor shall evaluate whether analytical procedures that are performed near the end of the audit, when forming an overall conclusion as to whether the financial report is consistent with the auditor’s understanding of the entity, indicate a previously unrecognised risk of material misstatement due to fraud.  (Ref: Para. A51)

If the auditor identifies a misstatement, the auditor shall evaluate whether such a misstatement is indicative of fraud.  If there is such an indication, the auditor shall evaluate the implications of the misstatement in relation to other aspects of the audit, particularly the reliability of management representations, recognising that an instance of fraud is unlikely to be an isolated occurrence.  (Ref: Para. A52)

If the auditor identifies a misstatement, whether material or not, and the auditor has reason to believe that it is or may be the result of fraud and that management (in particular, senior management) is involved, the auditor shall re‑evaluate the assessment of the risks of material misstatement due to fraud and its resulting impact on the nature, timing and extent of audit procedures to respond to the assessed risks.  The auditor shall also consider whether circumstances or conditions indicate possible collusion involving employees, management or third parties when reconsidering the reliability of evidence previously obtained.  (Ref: Para. A53)

If the auditor confirms that, or is unable to conclude whether, the financial report is materially misstated as a result of fraud the auditor shall evaluate the implications for the audit.  (Ref: Para. A54)

If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters exceptional circumstances that bring into question the auditor’s ability to continue performing the audit, the auditor shall:

1. Determine the professional and legal responsibilities applicable in the circumstances, including whether there is a requirement for the auditor to report to the person or persons who made the audit appointment or, in some cases, to regulatory authorities;
2. Consider whether it is appropriate to withdraw from the engagement, where withdrawal is possible under applicable law or regulation; and
3. If the auditor withdraws:
   1. Discuss with the appropriate level of management and those charged with governance the auditor’s withdrawal from the engagement and the reasons for the withdrawal; and
   2. Determine whether there is a professional or legal requirement to report to the person or persons who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s withdrawal from the engagement and the reasons for the withdrawal.  (Ref: Para. A55‑A58)

The auditor shall obtain written representations from management and, where appropriate, those charged with governance that:

1. They acknowledge their responsibility for the design, implementation and maintenance of internal control to prevent and detect fraud;
2. They have disclosed to the auditor the results of management’s assessment of the risk that the financial report may be materially misstated as a result of fraud;
3. They have disclosed to the auditor their knowledge of fraud or suspected fraud affecting the entity involving:
   1. Management;
   2. Employees who have significant roles in internal control; or
   3. Others where the fraud could have a material effect on the financial report; and
4. They have disclosed to the auditor their knowledge of any allegations of fraud, or suspected fraud, affecting the entity’s financial report communicated by employees, former employees, analysts, regulators or others.  (Ref: Para. A59‑A60)

If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor shall communicate these matters, unless prohibited by law or regulation, on a timely basis with the appropriate level of management in order to inform those with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities.  (Ref: Para. A61-A62)

Unless all of those charged with governance are involved in managing the entity, if the auditor has identified or suspects fraud involving:

1. Management;
2. Employees who have significant roles in internal control; or
3. Others where the fraud results in a material misstatement in the financial report,

the auditor shall communicate these matters with those charged with governance on a timely basis.  If the auditor suspects fraud involving management, the auditor shall communicate these suspicions with those charged with governance and discuss with them the nature, timing and extent of audit procedures necessary to complete the audit. Such communications with those charged with governance are required unless the communication is prohibited by law or regulation.  (Ref: Para. A61, A63-A65)

The auditor shall communicate, unless prohibited by law or regulation, with those charged with governance any other matters related to fraud that are, in the auditor’s judgement, relevant to their responsibilities.  (Ref: Para. A66)

If the auditor has identified or suspects a fraud, the auditor shall determine whether law, regulation or relevant ethical requirements:  (Ref: Para. A67‑A68)

1. Require the auditor to report to an appropriate authority outside the entity.
2. Establish responsibilities under which reporting to an appropriate authority outside the entity may be appropriate in the circumstances.

The auditor shall include the following in the audit documentation^[12] of the auditor’s understanding of the entity and its environment and the assessment of the risks of material misstatement required by ASA 315:^[13]

1. The significant decisions reached during the discussion among the engagement team regarding the susceptibility of the entity’s financial report to material misstatement due to fraud; and
2. The identified and assessed risks of material misstatement due to fraud at the financial report level and at the assertion level.

The auditor shall include the following in the audit documentation of the auditor’s responses to the assessed risks of material misstatement required by ASA 330:^[14]

1. The overall responses to the assessed risks of material misstatement due to fraud at the financial report level and the nature, timing and extent of audit procedures, and the linkage of those procedures with the assessed risks of material misstatement due to fraud at the assertion level; and
2. The results of the audit procedures, including those designed to address the risk of management override of controls.

The auditor shall include in the audit documentation communications about fraud made to management, those charged with governance, regulators and others.

If the auditor has concluded that the presumption that there is a risk of material misstatement due to fraud related to revenue recognition is not applicable in the circumstances of the engagement, the auditor shall include in the audit documentation the reasons for that conclusion.