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Fraud Consideration In Audit [SAS 99 Fundamentals]

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Communication about Possible Fraud To Management

The auditor should communicate any evidence that fraud may exist, even if such fraud is inconsequential, to the appropriate level of management.

The auditor should directly inform the audit committee about:

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  • Fraud involving senior management.
  • Fraud that causes a material misstatement of the financial statements.

 

The auditor should reach an understanding with the audit committee about the nature and extent of communications that need to be made to the committee about misappropriations committed by lower-level employees.

The auditor should consider whether the following are reportable conditions that should be communicated to senior management and the audit committee:

  • Identified risks of material misstatement due to fraud that have continuing control implications (whether or not transactions or adjustments that could result from fraud have been detected).
  • A lack of, or deficiencies in, programs and controls to mitigate the risk of fraud.

 

The auditor may also want to communicate other identified risks of fraud to the audit committee, either in the overall communication of business and financial statement risks affecting the entity or in the communication about the quality of the entity’s accounting principles.

Ordinarily, the auditor is not required to disclose possible fraud to anyone other than the client’s senior management and audit committee, and in fact, would be prevented by the duty of confidentiality from doing so. However, a duty to disclose to others outside the entity may exist when:

  • Complying with certain legal and regulatory requirements.
  • Responding to a successor auditor’s inquiries.
  • Responding to a subpoena.
  • Complying with requirements of a funding agency or other specified agency for audits that receive governmental financial assistance.

 

The auditor may wish to consult legal counsel before discussing these matters outside the client to evaluate the auditor’s ethical and legal obligations for client confidentiality.

Note: The auditor should document these communications to management, the audit committee, and others.

 

Continue Reading:

Fraud Consideration In Audit [SAS 99 Fundamentals]
Obtaining Information Needed To Identify Fraud Risks
Identifying Fraud Risks
Evaluating Audit Evidence
Documentation of Fraud Consideration

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