Evaluating Audit Evidence
The auditor should:
- Assess the risk of material misstatement due to fraud throughout the audit.
- Evaluate whether analytical procedures performed as substantive tests or in the overall review indicate a previously unidentified fraud risk.
- Evaluate the risk of material misstatement due to fraud at or near the completion of fieldwork.
- Respond to misstatements that may result from fraud.
- Consider whether identified misstatements may be indicative of fraud, and if so, evaluate their implications.
Assessing the Risk of Material Misstatements Due to Fraud
The auditor should continuously assess the risk of material misstatement due to fraud throughout the audit. The auditor should be alert for conditions that may change or support a judgment regarding the risk assessment.
Evaluating Analytical Procedures
The auditor should consider whether analytical procedures performed as substantive tests or in the overall review stage of the audit indicate a risk of material misstatement due to fraud. The auditor should perform analytical procedures relating to revenue through the end of the reporting period, either as part of the overall review of the audit or separately. If not included during the overall review stage of the audit, the auditor should perform analytical procedures specifically related to potentially fraudulent revenue recognition.
The auditor should be alert to responses to inquiries about analytical relationships that are:
- Vague or implausible
- Inconsistent with other audit evidence
Note: The auditor should document other conditions or analytical relationships that result in additional procedures, and any other responses the auditor feels are necessary.
Evaluating Fraud Risk at or near the Completion of Fieldwork
The auditor should, at or near the end of fieldwork, evaluate whether the results of auditing procedures and observations affect the earlier assessment of the risk of material misstatement due to fraud. When making this evaluation, the auditor with final responsibility for the audit should confirm that all audit team members have been communicating information about fraud risks to each other throughout the audit.
Responding to misstatements that may result from fraud. When misstatements are identified, the auditor should consider whether they are indicative of fraud. The auditor may need to consider the impact on materiality and other related responses. If the auditor believes that the misstatements are or may result from fraud, but the effect is not material to the financial statements, the auditor should evaluate the implications for the rest of the audit. If the auditor determines that there are implications, such as implications about management’s integrity, the auditor would reevaluate the assessment of the risk of material misstatement due to fraud and its impact on the nature, timing, and extent of substantive tests and the assessment of control risk if control risk was assessed below the maximum.
If the auditor believes that the misstatements are fraudulent, or may result from fraud, and the effect is material (or if the auditor cannot evaluate the materiality of the effect) the auditor should:
- Try to obtain additional evidence to determine whether fraud occurred and what its effect would be.
- Consider how it affects the rest of the audit.
- Discuss the matter and a plan for further investigation with a level of management at least one level above those involved, as well as senior management and the audit committee. If senior management is involved, it may be appropriate for the auditor to hold the discussion with the audit committee.
- Consider suggesting that the client consult legal counsel.
After evaluating the risk of material misstatement, the auditor may determine that he or she should withdraw from the engagement and communicate the reason to the audit committee. The auditor may wish to consult legal counsel when considering withdrawing from the engagement.
Note: Because of the wide variety of circumstances involved, the SAS points out that it is not possible to definitively point out when the auditor should withdraw. However, the auditor may want to consider the implications of the fraud for management’s integrity and the cooperation and effectiveness of management and/or board of directors when considering whether to withdraw.
Fraud Consideration In Audit [SAS 99 Fundamentals]
Obtaining Information Needed To Identify Fraud Risks
Identifying Fraud Risks
Communication about Possible Fraud To Management
Documentation of Fraud Consideration
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