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1. CPA’s responsibility of detecting fraud in FS audit
The primary responsibility of the auditor in an audit
of financial statements is to express an opinion on
the financial statements. The auditor’s responsibility
relating to fraud is only a secondary responsibility in
the conduct on an audit. As per ISA 240 par.4, the
primary responsibility for the prevention and
detection of fraud rests with those charged with
governance of the entity and management. Hence,
auditors cannot be sued for not being able to detect
fraud in an audit since their primary responsibility is
restricted to the expression of an opinion on the
financial statements. However, if the auditor is
engaged to perform fraud audit or fraud
examination, they will be responsible for fully
considering and detecting fraud.
2. Explain the need for an attitude of professional
scepticism in performing an audit.
ISA 200, par. 15 compels the auditors to plan and
perform an audit with professional skepticism
recognizing that circumstances may exist that cause
the financial statements to be materially misstated.
This is also one of the requirements stated in ISA 240
par. 12-14.
The need of having an attitude of professional
skepticism in performing an audit is elaborated in ISA
240, par A7-A8. It states that the auditor’s
professional skepticism is particularly important
when considering the risk of material misstatement
due to fraud because of the characteristics of fraud
itself.
As in the case of recurring audit or continuing
engagements, the auditor may have proved in the
past the honesty and integrity of the client’s
management and those charged with the
governance and it is not expected that he/she
disregard such fact however, it is particularly
important that the auditor have the attitude of
professional skepticism in this case because there
may have been a change in the circumstances
already.
3. Characteristics of fraud and 3 conditions required
for fraud to occur
Fraud is one of the reasons why there might be
material misstatements in financial statements. As
distinguished from error, its underlying action which
resulted in the misstatement of FS is intentional.
Specifically defined, it is an intentional
misstatements or omissions that are intended to
deceive the users of FS.
Fraud is a broad legal concept but in auditing, the
auditor is primarily concerned with fraud that causes
a material misstatement in the financial statements.
(ISA 240, par 2-3)
FRAUD TRIANGLE- 3 elements needed in order to
perpetrate fraud (ISA 240, par A1)
(1) Incentives or pressure to commit fraud-
circumstances which led the perpetrator to
commit fraud; there should be benefits which
would motivate the fraudster to commit the
fraud or pressure exist which will leave him no
choice but to commit the fraud
(2) Perceived opportunity- loopholes/ weakness in
the system which would allow the perpetrator to
commit fraud
(3) Rationalizations- specific reasons why the
perpetrator chose to commit fraud
4. 2 types of financial statement fraud covered by ISA
240 (par. A1-A6)
(1) Fraudulent financial reporting
- involves intentional misstatements including
omissions of amounts or disclosures in FS to
deceive FS users
- may be caused by the efforts of management
to manage earnings in order to deceive FS
users by influencing their perception as to the
entity’s performance and profitability
- Often involves management override of
control
- may be accomplished by (a) manipulation,
falsification, or alteration of acctg records or
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supporting docs from which the FS are prepared;
(b) misrepresentations in, or intentional
omission from the FS of events, trnxns or other
significant info; (c) intentional misapplication of
acctg principles relating to amounts,
classification, manner of presentation, or
disclosure (ISA 240, par A3)
(2) Misappropriation of Assets
- refers to the theft of an entity’s assets and is
often perpetrated by employees in relatively
small and immaterial amounts.
- may also involve management who are
usually more able to conceal
misappropriations in ways difficult to detect.
- often accompanied by false or misleading
records/documents in order to conceal the
fact that the assets are missing or have been
pledged without proper authorization
- may be accomplished by (a) embezzling
receipts; (b) stealing physical assets or
intellectual property; (c) causing the entity to
pay for goods and services not received; (d)
using an entity’s assets for personal use (ISA
240, par. A5)
5. Describe the requirements of ISA 240
(1) Professional skepticism- auditors shall maintain
the attitude of professional skepticism
recognizing the possibility that a material
misstatement due to fraud may exist,
notwithstanding the auditor’s past experience of
honesty and integrity of the entity’s
management and those charged with
governance (ISA 240, par 12)
(2) Discussion among the engagement team-
discussion of engagement team members and
determination by the engagement partner of
which matters are to be communicated to those
team members not involved in the discussion;
places a particular emphasis on how and where
the entity’s FS may be susceptible to material
misstatement due to fraud, including how fraud
might occur (ISA 240, par 15)
(3) Risk assessment procedures and related
activities- performed to obtain an understanding
of the entity and its environment, including the
entity’s internal control; (ISA 240, par 16)
(4) Identification and assessment of the risk of
material misstatement due to fraud- as per ISA
315, the auditor shall identify and assess the risk
of material misstatement due to fraud at the (a)
financial statement level, and (b) at the assertion
level for classes of transactions, account
balances and disclosures
(5) Responses to the assessed risks of material
misstatement due to fraud-
a. OVERALL RESPONSES- determine overall
response to address the assessed risk of
material misstatement due to fraud at
the financial statement level (ISA 240,
par 28)
b. AT THE ASSERTION LEVEL- auditor shall
design and perform further audit
procedures whose nature, timing and
extent are responsive to the assessed
risks of material misstatement due to
fraud at the assertion level (ISA 240, par
30)
c. RELATED TO MGT OVERRIDE OF
CONTROLS
(6) Evaluation of audit evidence
- Evaluate whether analytical procedures
performed near the end of the audit indicate
a previously unrecognized risk of material
misstatement due to fraud (ISA 240 par 34)
- Evaluate identified misstatement if such is
indicative of fraud; if yes, evaluate
implications of misstatement in relation to
other aspects of the audit (ISA 240, par 35)
- For misstatements identified which is
reasonably believed to have been resulted
from fraud and that mgt is involved,
revaluate the assessment of the risks of
material misstatement due to fraud and its
resulting impact on the nature, timing and
extent of audit procedures to respond to the
assessed risks; consider conditions indicating
possible collusion when reconsidering the
reliability of the evidences previously
obtained (ISA 240, par 26)
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- Evaluate implications of audit if auditor
confirms (or unable to conclude) whether FS
are materially misstated (ISA 240, par 37)
(7) Auditor unable to continue the engagement-
there may be circumstances which bring into
question the auditor’s ability to continue
performing the audit as a result of the
misstatement resulting from fraud or suspected
fraud. Under such circumstances, the auditor
shall take courses of action prescribed in ISA 240,
par. 38 (a) to (c)
(8) Written Representations- auditor shall obtain
written representations from mgt and, where
appropriate, those charged with governance
indicating:
- Acknowledgment of responsibility for
internal control in fraud detection and
prevention
- Disclosure to the auditor of result of mgt’s
assessment of the risks that the FS may be
materially misstated due to fraud
- Disclosure to the auditor of their knowledge
of (suspected) fraud involving mgt,
employees w/ significant roles in Internal
ctrl, or others where fraud could have a
material effect on the FS
- Disclosure to the auditor of their knowledge
of any allegations of (suspected) fraud
affecting FS communicated by employees,
former employees, analysts, regulators or
others
(9) Communications to management and with those
charged with governance- discussed in item (6)
(10) Communication to regulatory and enforcement
authorities- discussed in item (7)
(11) Documentation-
The following shall be included in audit
documentation:
- Those required by ISA 315 in relation to
Auditor’s understanding of the entity and its
environment and the assessment of the risk
of material misstatement
- those required by ISA 330 in relation to
Auditor’s responses to the assessed risk of
material misstatement
- communications about fraud made to mgt,
those charged with governance, regulators
and others
- the reason for concluding that the
presumption that there is a risk of material
misstatement due to fraud related to
revenue recognition is not applicable in the
circumstance of the engagement, if such
conclusion was made
(ISA 240 par. 44-47)
6. Identify individuals or groups within the company
that an auditor is obligated to communicate with
when he or she finds or suspects fraud
(1) To appropriate level of management-
determination of which level is a matter of
professional judgment and is affected by such
factors as the likelihood of collusion and the
nature and magnitude of the suspected fraud;
usually, at least one level above the persons who
appear to be involved with the suspected fraud
(ISA 240 par. A60)
(2) To those charged with governance (provided
they are not involved in managing the entity) - if
it is identified/suspected that the fraud involves:
a. Management;
b. Employees who have significant roles in
internal control; or
c. Others where the fraud results in a
material misstatement in the FS
(ISA 240, par 41)
7. Determine whether the auditor may be obligated to
communicate information about fraud to parties
external to the company
- Auditors have a professional duty to maintain
the confidentiality of the client information which
may preclude them from disclosing the
occurrence of fraud to a party outside the client
entity. However, there are circumstances stated
in the standards wherein this professional duty
may be overridden, to wit:
o Confidentiality duty may be overridden
by statute, the law or courts of law
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o Auditor of Financial institution has a
statutory duty to report occurrence of
fraud to supervisory authorities
o Auditor has a duty to report
misstatements to authorities in those
cases where management and those
charged with governance fail to take
corrective action
o Auditor may consider it appropriate to
obtain legal advice to determine the
appropriate course of action in the
circumstances

(ISA 240 par. 43; par. A65-A66)