so what is the auditor's responsibility towards fraud and error in the financial statements well fraud is deliberate stealing of cash, assets or in indeed overstating profits, error is accidental i suppose at the end of the day they can have the same financial impact. what first of all is the auditor's responsibility with regard to fraud and the first thing we can say is there are two levels of fraud there is fraudulent financial reporting, this is where maybe to boost the share price or maybe to encourage investors in the company or to encourage the bank to give a loan, maybe you overstate the profit of the company you make it look a much healthier less risky company than it really is and this is what induces the investors in the bank to provide you with capital. or you report inflated profits in the hope that the share price will be driven up so you can then sell the shares. or you cover up losses in some way in in the hope that okay we've made huge losses this year we don't want to tell anyone about that otherwise it was confidence it will cover up those losses in the hope that in the subsequent years will will will come good so that can do huge damage to investors banks financial institutions members the other type of fraud is the misappropriation of assets from the company the theft of inventory the misappropriation of cash it can be awarding contracts at a very high price uh so that the the buyer gets you know a 20% kind of kickback,a commission, this is essentially stealing money from the company, so we have these two levels of fraud and both are potentially serious. the biggest question really is what does the auditor's responsibility towards discovering fraud or indeed preventing fraud and the simple answer is relatively little. it is management's responsibility to ensure that as a proper system of internal control which should be sufficiently good to prevent or detect fraud. the auditors have no specific duty to detect fraud and indeed many frauds are relatively small repeated very often and the chance of an auditor maybe picking up small fraudulent transactions is is really quite small, probably not a good use of their time in fact. but when the fraud gets large and it becomes so large and it's going to cause a material misstatement in the financial statements, then like any material misstatement caused for any reason whether innocently or fraudulently, then the auditors should have spotted that, they they say in the audit report that it gives reasonable assurance that the financial statements are free of material misstatements okay it's not a guarantee but no one is really very happy if material misstatements get into the published financial statements so no routine ongoing need to discover fraud but you should be aware that it can happen as part of the planning you should be aware that some companies are going to be more susceptible to fraud than others simply because of the maybe the sort of operations they're in you should be aware that the internal controls are very poor then this opens the the door very often to fraud because maybe you don't have segregation of duties you don't have proper authorizations and so on. once a fraud is discovered it has to be reported to management. the big question of course is if you discover a fraud let's say 20 dollars is is this just an isolated fraud carried out once by one person or is it really the tip of the iceberg how long has it been going on how much money over the course of the fraud has been sucked out of the company how many people are involved we we need to get to that in a way our our suspicions have been alerted. once small fraud is discovered uh we we can't kind of pretend we didn't see it we must act with integrity and follow it up