The Auditor_s Responsibilities - Chapter 3

7/21/2019 The Auditor_s Responsibilities - Chapter 3

http://slidepdf.com/reader/full/the-auditors-responsibilities-chapter-3 1/38

AUDITOR’S

RESPONSIBILITY



• Auditor’s Responsibility is to designthe udit to pro!ide resonblessurn"e o# dete"ting $teril

$isstte$ents in the %nn"ilstte$ents



• The $isstte$ents $y e$nte

#ro$&

• '( Error

•

)( *rud• +( Non"o$plin"e ,ith L,s nd

Regultions



ERRORRe#ers to unintentionl

$istte$ents in the%nn"il stte$ents

In"luding the o$ission o#n $ount or dis"losure



ERRORS ARE&•

-the$ti"l or "leri"l $ist.es in theunderlying re"ords nd ""ounting dt

• An in"orre"t ""ounting esti$te rising #ro$

o!ersight or $isinterprettion o# #"ts

• -ist.e in the ppli"tion o# ""ounting poli"ies



*RAUD

/re#ers to intentionl "t by one or$ore indi!iduls $ong $nge$ent

/ Those "hrged ,ith go!ernn"e0e$ployees0 or third prties0 in!ol!ingthe use o# de"eption to obtin nun1ust or illegl d!ntge(



*RAUD•

Auditor is pri$rily "on"erned ,ith&

#rudulent "ts tht "use $teril$isstte$ent in the %nn"il stte$ents

Types o# *rud

'( *rudulent %nn"il reporting

)( -ispproprition o# ssets ore$ployees #rud



SYSTE-

O*2UALITY 3ONTROL



'( *rudulent %nn"il reporting/

in!ol!es intentionl$isstte$ents or o$issions o#$ounts or dis"losures in the

%nn"il stte$ents to de"ei!e%nn"il stte$ent users

/ .no,n s $nge$ent #rud



-nge$ent *rud in!ol!es&

'( -nipultion0 #lsi%"tion orltertion o# re"ords or do"u$ents

)( -isrepresenttion in or intentionl

o$ission o# the e4e"ts o#trns"tions #ro$ re"ords ordo"u$ents

+( Re"ording o# trns"tions ,ithoutsubstn"e

5( Intentionl $isppli"tion o#

""ounting poli"ies



• *inn"il stte$ent #rud – is deliberte $isrepresenttion0 $isstte$ent or

o$ission o# %nn"il stte$ent dt #or the purposeo# $isleding the reder nd "reting #lsei$pression o# n orgni6tion7s %nn"il strength(

– Publi" nd pri!te businesses "o$$it %nn"il

stte$ent #rud to se"ure in!estor interest or obtinbn. ppro!ls #or %nn"ing0 s 1usti%"tion #orbonuses or in"resed slries or to $eete8pe"ttions o# shreholders(

– Upper $nge$ent is usully t the "enter o#

%nn"il stte$ent #rud be"use %nn"ilstte$ents re "reted t the $nge$ent le!el(



-ethods

*inn"il stte$ent #ruds #ll into generl"tegories( These in"lude

( i$proper re!enue re"ognition0

b( $nipultion o# libilities0

"( $nipultion o# e8penses0

d( i$proper dis"losures on %nn"ilstte$ents nd

e( o!erstting ssets



I$proper Re!enue Re"ognition

• The $ost "o$$on s"he$e used in %nn"il stte$ent #rud in!ol!es$nipultion o# re!enue %gures(

• A""ording to sur!ey by Deloitte o# A""ounting nd Auditing

En#or"e$ent Releses 9AAER: %led by the SE3 #ro$ );;; through);;<0 i$proper re!enue re"ognition ,s re"ogni6ed s the s"he$ee$ployed in +< per"ent o# the 5;+ "ses studied(

•

S"he$es to $nipulte re!enue %gures typi"lly in!ol!e postingsles be#ore they re $de or prior to py$ent(

• E8$ples in"lude re"ording produ"t ship$ents to "o$pny/o,ned#"ilities s sles0 re/in!oi"ing pst due ""ounts to i$pro!e the geo# re"ei!bles0 pre/billing #or #uture sles nd dupli"te billings



-nipulting E8penses

• Another #rud in!ol!ing %nn"il stte$ents is the deliberte$nipultion o# e8penses(

• The Deloitte sur!ey o# AAER %lings by the SE3 sho,s tht ') per"entin!ol!ed e8pense $nipultion nd < per"ent $nipultion o# libilities(

• An e8$ple o# $nipulting e8penses is to "pitli6e nor$l operting

e8penses( This s"he$e is n i$proper $ethod to dely re"ognition o# thee8pense nd rti%"illy rise in"o$e %gures(

• An e8$ple o# this type o# s"he$e is the >orld3o$ s"ndl0 ,here

signi%"nt operting e8penses ,ere listed s "pitl on the bln"e sheet(

• 3on"el$ent nd $nipultion o# libilities #ruds in"lude #ilure to re"ord""ounts pybles or report regulr e8penses on %nn"il stte$ents(?eeping "ertin libilities0 le!ing notes or lons o4/the/boo.s nd ,ritingo4 $oney lent to e8e"uti!es re lso "o$$on $ethods o# #rud(



I$proper Dis"losures

•

Dis"losure #ruds re "o$$only bsed on$isrepresenting the "o$pny nd $.ing#lse representtions in press releses ndother "o$pny %lings(

•

-.ing #lse stte$ents in the "o$$entryse"tions o# nnul reports o# otherregultory %lings re nother sour"e #ori$proper dis"losures(

• So$e dis"losures $ight be intentionlly"on#using or obs"ure nd i$possible to"o$pletely understnd



• )( -ispproprition o# ssets or

e$ployee #rud – In!ol!es the#t o# n entity’s ssets

"o$$itted by the entity’s e$ployees

This in"ludes&

( E$be66ling re"eiptsb( Steling entity’s ssets su"h s "sh0

$r.etble se"urities0 nd in!entory

"( Lpping o# ""ounts re"ei!ble

Note& o#ten ""o$pnied by #lse or$isleding re"ords or do"u$ents in order to"on"el the #"t tht the ssets re $issing



• O!erstting Assets

O!erstte$ent o# "urrent ssets on%nn"il stte$ents nd #ilure to

re"ord depre"ition e8penses re o#tene$ployed s $ethods o# #rud(

O!erstte$ent o# in!entory nd""ounts re"ei!bles re lso"o$$only used to in@te "o$pnyssets on #rudulent stte$ents



• *rud in!ol!es

– -oti!tion to "o$$it it

– A per"ei!ed opportunity to do so

Distinguish *rud #ro$ Error

/ >hether the underlying "use o#$isstte$ent in the %nn"il stte$ents

is intentionl or unintentionl(



Responsibility o# -nge$ent nd Those"hrged ,ith go!ernn"e

– -nge$ent to estblish "ontrolen!iron$ent nd to i$ple$ent internl"ontrol poli"ies nd pro"edures designedto ensure the dete"tion nd pre!ention o##rud(

–

Indi!iduls "hrged ,ith go!ernn"e o# nentity to ensure the integrity o# n entity’s""ounting nd %nn"il reporting syste$nd tht pproprite "ontrols re in pl"e(



Auditor’s Responsibility

-

To design the udit to obtin resonblessurn"e tht the %nn"il stte$entsre #ree #ro$ $teril $isstte$ent,hether "used by error or #rud(

Plnning Phse '( Auditor should $.e inuiries o# $nge$ent boutthe possibility o# $isstte$ent due to #rud or error&

( -nge$ent s ssess$ent o# ris. due to #rud

b( 3ontrols estblished to ddress the ris.s"( Any $teril error or #rud tht hs 4e"ted the

entity or suspe"ted #rud tht the entity isin!estigting(



• )( Auditor should ssess the ris. tht

#rud nd error $y "use the *S to"ontin $teril $isstte$ents

•

PAS )5; reuires the uditor tospe"i%"lly Cassess the risk ofmaterial misstatements due to fraud

and consider that assessment indesigning the audit procedures to be performed”



*rud ris.s #"tors

- Identi#y e!ents or "onditions thtpro!ide n opportunity

- A $oti!e or $ens to "o$$it #rud

- Indi"te tht #rud $y lredy h!eo""urred



• Auditor’s Pro#essionl 1udg$ents $y bein@uen"ed & – The uditor $y ppro"h the udit ,ith

heightened le!el o# pro#essionl s.epti"is$

– The uditor’s bility to ssess "ontrol ris. tless thn high le!el $y be redu"ed nd heshould be sensiti!e to the bility o# the$nge$ent to o!erride "ontrols

– The udit te$ $y be sele"ted in ,ys thtensure tht the .no,ledge0 s.ill nd bility o#personnel ssigned signi%"nt responsibilitiesre "o$$ensurte ,ith the uditor’sssess$ent o# ris.



/ The uditor $y de"ide to"onsider $nge$ent sele"tion ndppli"tion o# signi%"nt ""ounting

poli"ies0 prti"ulrly those relted toin"o$e deter$intion nd sset!lution(



Testing Phse

• +( During the "ourse o# the udit0 theuditor $y en"ounter "ir"u$stn"estht $y indi"te the possibility o# #rud

or error

• 5( A#ter identi#ying $teril $isstte$ent

in the *S• Resulted #ro$ #rud or n error(

• Errors ,ill result to d1ust$ents o# *S

• *rud $y h!e other i$pli"tions on n udit



Not -teril e4e"t o# *rud

• Auditor should

– Re#er the $tter to pproprite le!el o#$nge$ent

– Be stis%ed tht0 the #rud hs no otheri$pli"tions #or other spe"ts o# theudit nd tht those i$pli"tions h!ebeen deutely "onsidered



-teril e4e"t o# the *rud or

unble to e!lute

• The Auditor should&

/ "onsider i$pli"tion #or otherspe"ts o# the udit prti"ulrly therelibility o# $nge$entrepresenttion

/ dis"uss the $tter nd the

ppro"h to #urther in!estigtion ,ithn pproprite le!el o# tht is t lestone le!el bo!e those in!ol!ed



• / tte$pt to obtin e!iden"e todeter$ine ,hether $teril #rudin #"t e8ists nd i# so their e4e"ts

nd

• Suggest tht the "lient "onsult ,ith

legl "ounsel bout uestion o# l,



3O-PLETION PASE

• ( The uditor should obtin ,rittenrepresenttion #ro$ the "lient’s$nge$ent tht

– It ".no,ledge the responsibility #or thei$ple$enttion nd opertion o#

""ounting nd internl "ontrol syste$tht re designed to pre!ent nd dete"t#rud nd error



– It belie!es the e4e"ts o# those un"orre"ted%nn"il stte$ents ggregted by the

uditor during the udit re i$$teril to the*S t.en s ,hole

– It hs dis"losed to the uditor ll signi%"nt

#"ts relting to #ruds or suspe"ted #ruds.no,n to $nge$ent tht $y h!e4e"ted the entity

– It hs dis"losed to the uditor the results o#its ssess$ent o# the ris. tht the *S $y be$terilly $isstted s result o# #rud(



3O-PLETION PASE

• F( -teril Errors or #rud e8ist

– e should reuest the $nge$ent tore!ise the *S0 other,ise he ,ill e8press

uli%ed or d!erse opinion

G( Unble to e!lute the e4e"t o# #rud

on the *Sbe"use o# li$ittion o# s"ope0 he

should either uli#y or dis"li$ hisopinion on the *S



Non"o$plin"e ,ith L,s nd

Regultions

• Non"o$plin"e

– Re#ers to "ts o# o$ission or "o$$ission bythe entity being udited0 either intentionl orunintentionl0 ,hi"h re "ontrry to thepre!iling l,s or regultions(

– In"ludes trns"tions entered into by or in then$e o# 0 the entity or on its behl# by its$nge$ent or e$ployees(

E8$ple& T8 e!sion0 !ioltion o#en!iron$entl prote"tion l,s0 inside trding o#se"urities



-nge$ent’sResponsibilities

• PAS );

– The responsibility #or the pre!ention nddete"tion o# non"o$plin"e rests ,ith

$nge$ent



*ollo,ing poli"ies ndpro"edures

• -onitoring legl reuire$ents ndensuring tht operting pro"eduresre designed to $eet these

reuire$ents

• Instituting nd operting pproprite

syste$ o# internl "ontrol

• De!eloping0 publi"i6ing nd #ollo,ing 3ode o# 3ondu"t



• Ensuring e$ployees re properlytrined nd understnd the 3ode o#

3ondu"t• -onitoring "o$plin"e ,ith the 3ode

o# 3ondu"t nd "ting ppropritely

to dis"ipline e$ployees• Engging legl d!isors in $onitoring

legl reuire$ents

•

-intining register o# signi%"ntl,s ,ith ,it"h the entity hs to"o$ply ,ithin its prti"ulr industrynd re"ord o# "o$plins



Auditor’s Responsibility

• Plnning Phse

– ' Obtin generl understnding o# thelegl nd regultory #r$e,or.

ppli"ble to the entity(

– )( Design pro"edures to help identi#y

instn"es o# non"o$plin"e ,ith thosel,s nd regultions ,herenon"o$plin"e should be "onsidered,hen prepring *S



• +( Design udit pro"edures to obtinsuH"ient pproprite udit e!iden"ebout "o$plin"e ,ith those l,s

nd regultions generlly re"ogni6edby the uditor

• E4e"t on the deter$intion o# $teril$ounts nd dis"losures in *S

The Auditor_s Responsibilities - Chapter 3

Documents

Transcript of The Auditor_s Responsibilities - Chapter 3