This Auditing Standard deals with the auditor’s responsibilities relating to fraud in an audit of a financial report.  Specifically, it expands on how ASA 315[1] and ASA 330[2] are to be applied in relation to risks of material misstatement due to 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. 

Although fraud is a broad legal concept, for the purposes of the Australian Auditing Standards, the auditor is concerned with fraud that causes a material misstatement in the financial report.  Two types of intentional misstatements are relevant to the auditor – misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets.  Although the auditor may suspect or, in rare cases, identify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually occurred.  (Ref: Para. A1‑A7)

The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.  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 a culture of honesty and ethical behaviour which can be reinforced by an 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 manage earnings in order to influence the perceptions of analysts as to the entity’s performance and profitability.

Responsibilities of the Auditor

An auditor conducting an audit in accordance with Australian Auditing Standards is responsible for obtaining reasonable assurance that the financial report taken as a whole is free from material misstatement, whether caused by fraud or error.  Owing to the inherent limitations of an audit, 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 Australian Auditing Standards.[3]

As described in ASA 200,[4] the potential effects of inherent limitations are particularly significant in the case of misstatement resulting from fraud.  The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error.  This is because fraud may involve sophisticated and carefully organised schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor.  Such attempts at concealment may be even more difficult to detect when accompanied by collusion.  Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact, false.  The auditor’s ability to detect a fraud depends on factors such as the skilfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved.  While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for the auditor to determine whether misstatements in judgement areas such as accounting estimates are caused by fraud or error.

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. 

When obtaining reasonable assurance, the auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.  The requirements in this Auditing Standard are designed to assist the auditor in identifying and assessing the risks of material misstatement due to fraud and in designing procedures to detect such misstatement.

The auditor may have additional responsibilities under law, regulation or relevant ethical requirements regarding an entity’s non‑compliance with laws and regulations, including fraud, which may differ from or go beyond this and other Australian Auditing Standards, such as: (Ref: Para. A6)

1. Responding to identified or suspected non‑compliance with laws and regulations, including requirements in relation to specific communications with management and those charged with governance, assessing the appropriateness of their response to non‑compliance and determining whether further action is needed;
2. Communicating identified or suspected non‑compliance with laws and regulations to other auditors (e.g., in an audit of a group financial report); and
3. Documentation requirements regarding identified or suspected non‑compliance with laws and regulations.

Complying with any additional responsibilities may provide further information that is relevant to the auditor’s work in accordance with this and other Australian Auditing Standards (e.g., regarding the integrity of management or, where appropriate, those charged with governance).

[Deleted by the AUASB.  Refer Aus 0.3]