Fraud Consideration In Audit SAS 99In every audit, the auditor is obligated to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Before going to the topic, let me start with some basic questions; (1) What Does Fraud really means? According to SAS99, Term and Definition: Fraud is An intentional act that results in a material misstatement in financial statements that are the subject of an audit. The primary distinction between fraud and error is whether the underlying action that causes the misstatement of the financial statements is intentional or unintentional; (2) What are misstatements arising from fraudulent financial reporting? You asked. It is an intentional misstatements or omissions of amounts or disclosures in financial statements designed to deceive financial statement users when the effect causes the financial statements not to be presented, in all material respects, in conformity with GAAP; (3) How about misstatements arising from misappropriation of assets? It is the theft of an entity’s assets where the effect of the theft causes the financial statements not to be presented in conformity with generally accepted accounting principles (sometimes referred to as defalcation).

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This post tries to reduce the official language of Statements on Auditing Standards (SAS) 99, the “Fraud consideration in financial statements audit”, so that it becomes easy-to-read and understandable advice. It is designed to help CPAs in the application of, and compliance with, authoritative standards . One of its key features is the separation of those things specifically required from advice, observations, and other subordinate information. Thus, a user may quickly identify the minimum requirements of the SAS 99. This is a helpful techniques for complying with the fundamental requirements of the SAS99.

Disclaimer: As with all accounting and auditing publications in this site are merely guide. It is not a substitute for professional judgment. It can, however, be a valuable reference tool.

 

SAS 99 states that the guidance in the statement is meant to be integrated into an overall audit process that is consistent with the requirements in other sections, including Section 311, Planning and Supervision Section 312, Audit Risk and Materiality in Conducting an Audit Section 319, Consideration of Internal Control in a Financial Statement Audit Also, since auditing involves a continuous, rather than a sequential process, the sequence of the requirements of this statement may be implemented differently in various audit engagements.

 

 

Professional Skepticism

Professional skepticism is an attitude that includes a questioning mind and critical assessment of audit evidence.

  • The auditor should conduct the entire engagement with an attitude of professional skepticism, recognizing that fraud could be present, regardless of past experience with the entity or beliefs about management’s integrity.
  • The auditor should not let his or her beliefs about management’s integrity allow the auditor to be satisfied with any audit evidence that is less than persuasive.
  • Finally, the auditor should continuously question whether information and evidence obtained suggest that material misstatement caused by fraud has occurred.

 

 

Fraud Brainstorming

When planning the audit, members of the audit team should discuss where and how the financial statements may be susceptible to material misstatement caused by fraud. This discussion should include:

  • Exchanging ideas and brainstorming about where the financial statements are susceptible to fraud, how assets could be stolen, and how management might engage in fraudulent financial reporting.
  • Emphasizing the need to maintain the proper mindset throughout the audit regarding the potential for fraud. As previously discussed, the auditor should continually exercise professional skepticism and have a questioning mind when performing the audit and evaluating audit evidence. Engagement team members should thoroughly probe issues, acquire additional evidence when necessary, and consult with other team members and firm experts as needed.
  • Considering known external and internal factors affecting the entity that might create incentives and opportunities to commit fraud, and indicate an environment that enables rationalizations for committing fraud.
  • Considering the risk that management might override controls.
  • Considering how to respond to the susceptibility of the financial statements to material misstatement caused by fraud.
  • For the purposes of this discussion, setting aside any of the audit team’s prior beliefs about management’s honesty and integrity.

 

The discussion would normally include key audit team members. Other factors that should be considered when planning the discussion include:

  • Whether to have multiple discussions if the audit involves more than one location.
  • Whether to include specialists assigned to the audit.\

 

Note: The SAS specifically notes that the auditor with final responsibility for the audit should be present for the exchange of ideas and brainstorming about fraud. The auditor should document this discussion, including how and when the discussion occurred, the audit team members involved, and the subject discussed. Audit team members should continue to communicate throughout the audit about the risks of material misstatement due to fraud.

 

Continue Reading:

Obtaining Information Needed To Identify Fraud Risks
Identifying Fraud Risks
Evaluating Audit Evidence
Communication about Possible Fraud To Management
Documentation of Fraud Consideration

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