Lecture on Auditor's Responsibility towards Fraud and Error

Introduction

• Importance of downloading free lecture notes from opentuition.com for a complete understanding.

Definitions

• Fraud: Deliberate acts such as stealing cash/assets or overstating profits.
• Error: Accidental mistakes; both can impact financial statements similarly.

Types of Fraud

1. Fraudulent Financial Reporting

   • Overstating profits to:
     • Boost share prices.
     • Encourage investments or loans.
     • Cover up losses temporarily.
   • Impacts investors, banks, and financial institutions negatively.

2. Misappropriation of Assets

   • Theft of inventory or cash.
   • Overpriced contracts for kickbacks.
   • Direct theft from the company.

Auditor's Responsibility

• Limited Responsibility:

  • Detecting or preventing fraud is primarily management’s duty.
  • Auditors focus on ensuring internal controls are effective.

• Detection of Fraud:

  • No specific duty to detect fraud unless it leads to material misstatement.
  • Small frauds often go undetected due to being immaterial.

• Material Misstatements:

  • Auditors must detect large frauds causing material misstatements.
  • Auditors provide reasonable assurance of accuracy in financial statements.

Planning and Awareness

• Be aware of potential fraud risk during planning.
• Companies may vary in susceptibility to fraud based on:
  • Operations.
  • Quality of internal controls.

Internal Controls

• Poor internal controls (e.g., lack of segregation of duties, authorizations) increase fraud risk.

Reporting and Investigating Fraud

• Discovered fraud must be reported to management.
• Determine if discovered fraud is isolated or part of a larger issue:
  • Investigate the extent and duration of the fraud.
  • Assess the number of people involved.

Auditor's Integrity

• Must follow up on discovered fraud with integrity and thorough investigation.