The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial Statements (Hkas240)

2. Professional standards outline the auditor’s consideration of material misstatements due to errors and fraud. Based on HKSA 240 The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial Statements,

(a) What responsibility does an auditor have to detect material misstatements due to errors and fraud?

HKSA240(21-22)

An auditor conducting an audit in accordance with HKSAs obtains reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. When obtaining reasonable assurance, an auditor maintains an attitude of professional skepticism throughout the audit, considers the potential for management override of controls and recognizes the fact that audit procedures that are effective for detecting error may not be appropriate in the context of an identified risk of material misstatement due to fraud.

What two main categories of fraud affect financial reporting?

HKSA240(7-11)

Two types of intentional misstatements are relevant to the auditor, that is, misstatements resulting from fraudulent financial reporting and misstatements resulting from misappropriation of assets.

Fraudulent financial reporting can be involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users, and management override of controls that otherwise may appear to be operating effectively. And it is usually caused by the efforts of management to manage earnings in order to deceive financial statement users by influencing their perceptions as to the entity’s performance and profitability.

Misappropriation of assets involves the theft of an entity’s assets and is often perpetrated by employees in relatively small and immaterial amounts. However, it can also involve management who are usually more able to disguise or conceal misappropriations in ways that are difficult to detect. Misappropriation of assets is...