We are responsible for obtaining reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error.

The distinguishing factor between fraud and error is that “fraud” is an intentional act designed to deceive, whereas “error” is something that occurs by a mistake, oversight or misinterpretation of facts.

We are concerned with fraud that may cause a material misstatement in the financial statements. The two major types of intentional misstatements affecting the audit are those resulting from:

  • Fraudulent financial reporting through falsifying records, creating false transactions or intentional misapplication of accounting policies. The primary motivation being to show performance as being better than it is.
  • Misappropriation of assets by an employee (or a member of the governing body or management). The primary motivation being for personal gain.

Both types of fraud involve overriding existing controls and creating false transactions or accounting entries as part of an intentional process to prevent the fraud from being discovered.

When performing the risk assessment it is necessary for us to make enquiries within the entity of any knowledge and details around fraud that may have taken place and any suspected or alleged fraud. The enquiries will also focus on the systems in place to prevent and identify fraud.

The specific enquiries focus on management, internal audit and those charged with governance and there is a questionnaire to be completed for each. The questionnaires can also form the basis for discussions at various meetings with your auditors. After they are completed, place them on the applicable letterhead and, address them to your appointed auditor and have them signed by the appropriate person.

There is some additional information relating to the overall environment that can also be helpful in understanding the operating environment and if there are any risks for us to consider. There are some additional questions in the in the fraud questionnaire for management that will assist your auditor to gain the understanding needed.

Page created: 14 September 2018