Auditor’s Responsibility

Balquin, Anne Marjorie B.Vallespin, April Rose V.

Client’s Management- fair presentation of

FS Auditor- design the audit to provide

reasonable assurance of detecting material misstatements which may emanate from: Error Fraud Noncompliance with Laws and Regulations

Responsibilities

Error

• Unintentional misstatements in the financial statements

Omission of an amount or a disclosure such as: Mathematical or clerical mistakes in

the underlying records and accounting data

An incorrect accounting estimate arising from oversight or misinterpretation of facts

Mistake in the application of accounting policies

Error

Fraud

• Intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deception to obtain unjust or illegal advantage.

1. Fraudulent Financial reporting

(Management Fraud)

2. Misappropriation of Assets or Employee Fraud

Types of Fraud

Management

establish a control environment and to implement internal control policies and procedures designed to ensure, among others, the detection and prevention of fraud and error.

Individuals charged with governance ensure the integrity of an entity’s

accounting and financial reporting systems and that appropriate controls are in place.

Responsibility of Management and those

Charged with Governance

Auditor’s Responsibility

• Design the audit to obtain reasonable assurance that the financial statements are free from material misstatements whether caused by error or fraud.

1. When planning an audit, the auditor

should make inquiries of management about the possibility of misstatements due to fraud and error.

2. The auditor should assess the risk that fraud or error may cause the financial statements to contain material misstatements.

Planning Phase

3. During the course of the audit, the

auditor may encounter circumstances that may indicate the possibilities of fraud or error. The auditor should perform procedures necessary to determine whether material misstatements exist.

4. The auditor should consider whether such misstatement resulted from a fraud or an error.

Testing Phase

If the auditor believes that the misstatements

may be a result of fraud and the effect is not material, the auditor should: Refer the matter to the appropriate level of

management at least one level above those involved.

Be satisfied that, given the position of the likely perpetrator, the fraud has no other implications for other aspects of the audit or that those implications have been adequately considered.

Testing Phase

If the auditor detects a material fraud or has been unable to evaluate whether the effect on the financial statement is material or immaterial, the auditor should:

Consider implication for other aspects of the audit particularly the reliability of management representations.

Discuss the matter and the approach to further investigation with an appropriate level of that is at least one level above those involved.

Attempt to obtain evidence to determine whether a material fraud in fact exists and, if so their effect

Suggest that the client consult with legal counsel about question of law.

5. The auditor should obtain a written

representation from the client’s management that: It acknowledges its responsibility for the

implementation and operations of accounting and internal control systems that are designed to prevent and detect fraud and error;

It believes the effects of those uncorrected financial statement misstatements aggregated by the auditor during the audit are immaterial, both individually and in the aggregate, to the financial statements taken as a whole.

Completion Phase

It has disclosed to the auditor all significant

facts relating to any frauds or suspected frauds known to management that may have affected the entity, and

It has disclosed to the auditor the results of its assessment of the risk that the financial statements may be materially misstated as a result of fraud.

Completion Phase

6. When the auditor believes that material error

or fraud exists, he should request the management to revise the financial statements. Otherwise, the auditor will express a qualified or adverse opinion.

7. If the auditor is unable to evaluate the effect of fraud on the financial statements because of the limitation on the scope of the auditor’s examination, the auditor should either qualify or disclaim his opinion on the financial statements.

Effect on the Auditor’s Report

Risk Factors Relating to Misstatements Resulting

from Fraud

1. Management’s Characteristics and Influence over the Control Environment

2. Industry Conditions3. Operating Characteristics and Financial

Stability

Management’s Characteristics and

Influence over the Control Environment

• Management’s abilities, pressures, style, and attitude relating to internal control and the financial reporting process.

Industry Conditions

• These fraud risk factors involve the economic and regulatory environment in which the entity operates.

Operating Characteristics and Financial Stability

• These fraud risk factors pertain to the nature and complexity of the entity and its transactions, the entity’s financial condition, and its profitability.

Fraud Risk Factors from Misappropriation

of Assets

1. Susceptibility of Assets to Misappropriation

2. Controls

Susceptibility of Assets to

Misappropriation

• These fraud risk factors pertain to the nature of an entity’s assets and the degree to which they are subject to theft.

Controls

• These fraud risk factors involve the lack of control designed to prevent or detect misappropriation of assets.

Noncompliance with Laws and Regulations

• Acts of omission of commission by the entity being audited, either intentional or unintentional, which are contrary to the prevailing laws or regulations.

Includes transactions entered into by, or in the

name of, the entity or on its behalf by its management or employees, such as: Tax evasion Violation of environmental protection laws Inside trading of securities

Noncompliance with Laws and Regulations

Ensure that the entity’s operations are

conducted in accordance with laws and regulations

Prevention and detection of noncompliance rests with management (PSA 250)

In larger entities, policies and procedures may be supplemented by assigning appropriate responsibilities to an internal audit function an audit committee.

Management’s Responsibility

Auditor’s Responsibility

• Recognize that noncompliance by the entity with laws and regulations may materially affect the financial statements.

1. Obtain general understanding of the legal

and regulatory framework applicable to the entity and the industry and how the entity is complying with that framework.

2. The auditor should design procedures to help identify instances of noncompliance with those laws and regulations where noncompliance should be considered when preparing financial statements.

Planning Phase

3. Design audit procedures to obtain sufficient

appropriate audit evidence about compliance with those laws and regulations generally recognized by the auditor to have an effect on the determination of material amounts and disclosures in financial statements.

Planning Phase

4. The auditor should obtain an understanding

of the nature of the act and the circumstances in which it has occurred, and sufficient other information to evaluate the possible effect on the financial statements.

5. The auditor should document the findings, discuss them with management, and consider the implication on other aspects of the audit.

Testing Phase

The auditor should obtain written

representations that management has disclosed to the auditor all known actual or possible noncompliance with laws and regulations that could materially affect the financial statements.

Completion Phase

7. Noncompliance- The auditor should request

the management to revise the financial statements. Otherwise, a qualified or adverse opinion will be issued.

8. The auditor should express a qualified opinion or a disclaimer of opinion if a scope limitation has precluded the auditor from obtaining sufficient appropriate evidence.

Effect on the Auditor’s Report