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Interpretation and Application of International Standards on Auditing by Steven Collings

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8

ISA 240 (REDRAFTED) THE AUDITOR’S RESPONSIBILITIES RELATING TO FRAUD IN AN AUDIT OF FINANCIAL STATEMENTS

The objective of this ISA is to outline the responsibilities the auditor has in connection with fraud issues. Fraud can be extremely difficult to detect due to the fact that most frauds are designed to be concealed. Fraud has become a major issue within the accountancy profession over recent years, which has been accentuated by well-publicised corporate disasters.

It is widely understood that misstatements within a set of general purpose financial statements can arise from either fraud or error. Misstatements within a set of financial statements are classified as fraud or error depending on whether they are intentional or unintentional.

ISA 240 (redrafted) differentiates fraud from error and defines fraud as:

an intentional act by one or more individuals among management, those charged with govern-ance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage.

[ISA240.11(a)]

Error, on the other hand, is defined as:

an unintentional misstatement in the financial statements including the omission of an amount or disclosure.

[ISA240.11(b)]

Fraud can also be sub-divided into two further categories:

  • management fraud; and
  • employee fraud.

Management fraud refers to fraud involving one or more members of management or those charged with governance whilst employee fraud refers to the level of fraud committed by non-management. In addition, ...

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