Fraud is a difficult issue for auditors, particularly when it comes to the 'expectations gap'. The 'expectations gap' in the auditing profession is the difference between what an auditor is expected to do to comply with professional standards and other regulation and what the general public expects the auditor to do. Fraud is one of those issues that frequently crops up unfortunately.
When a large corporate collapse happens (such as the collapse of a public interest entity) due to fraud, the question that is most frequently asked is 'why didn't the auditor spot that?'
The prevention and detection of fraud is ultimately the responsibility of management. However, the auditor is responsible for developing audit procedures which specifically deal with fraud and fraud risk factors. ISA (UK) 240 The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements provides guidance to auditors on dealing with fraud and fraud risk factors.
The FRC have recently revised ISA (UK) 240 specifically for the UK in their attempts to restore confidence in the audit profession. The revised ISA (UK), which is effective for audits of financial statements for periods commencing on or after 15 December 2021, includes additional clarifications and codifications of specific procedures, such as the need to consider both corroborative and contradictory evidence.
While the substance of ISA (UK) 240 remains the same, the auditor's objectives have been expanded to require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement due to fraud.
We have also seen recent changes to the auditor's report through amendments to ISA (UK) 700 Forming an Opinion and Reporting on Financial Statements. ISA (UK) 700 requires the auditor's report to specifically explain to what extent the audit was considered capable of detecting irregularities, including fraud.
To conclude, it is important that the auditor understands their responsibilities under the updated version of ISA (UK) 240 and maintains an appropriate level of professional scepticism when carrying out an audit. Remember, if the auditor detects a fraud risk factor they need to apply specific procedures to address the fraud risk. While there may not necessarily be a fraud having been committed, the discovery of a fraud risk factor increases the risk of material misstatement in the financial statements due to fraud.
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