Problem
Fraud in Financial Statements and Auditor Responsibilities
According to the AICPA audit standard on fraud, Consideration of Fraud in a Financial Statement Audit (AU-C Section 240), the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. A strong emphasis should be placed on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. As we discussed in chapter 3, this involves a commitment to creating a culture of ethical behavior, tone at the top, and reinforcement through governance structures.
Nature and Causes of Misstatements
Misstatements in the financial statements can result from errors or fraud and may consist of any of the following:
A. An inaccuracy in gathering or processing data from which financial statements are prepared.
B. A difference between the amount, classification, or presentation of a reported financial statement element, account, or item and the way that it should have been reflected under GAAP.
C. The omission of a financial statement element, account, or item.
D. A financial statement disclosure that is not presented in conformity with GAAP.
E. The omission of information required to be disclosed in conformity with GAAP.
F. An incorrect accounting estimate due to oversight, misrepresentation of facts, or fraud.
G. Management's judgments concerning an accounting estimate or the selection or application of accounting policies that the auditor may consider unreasonable or inappropriate.
For discussion purposes
• What steps would you take if you discover 1 of the above issues in a routine audit?
• Would you take the same steps if you discover all 7 issues above in a routine audit?