Statements of Position

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This proposed Statement on Auditing Standards (SAS) establishes standards and provides guidance to auditors in fulfilling their responsibility as it relates to fraud in an audit of financial statements conducted in accordance with generally accepted auditing standards (GAAS). The exposure draft also includes Appendix B, "A Proposed Amendment to SAS No. 1, Codification of Auditing Standards and Procedures (AICPA, Professional Standards, vol. 1, AU section 230, 'Due Professional Care in the Performance of Work.'" In 1997 the Auditing Standards Board (ASB) issued SAS No. 82, Consideration of Fraud in a Financial Statement Audit (AICPA, Professional Standards, vol.1, AU secs. 110, 230, 312, and 316), with an objective of enhancing auditor performance by providing auditors with additional operational guidance on the consideration of material fraud in a financial statement audit. At the time of issuance of SAS No. 82, the ASB committed to study the impact the standard would have on practice after its implementation and determine whether further enhancements would be appropriate. In response to that commitment, the Fraud Research Steering Task Force was formed and sponsored five academic research projects to obtain information that would be useful in the reexamination. The results of those research projects are briefly summarized in the section entitled "Additional Background Information," that appears subsequently. In 1998, at the request of the Securities and Exchange Commission , the Public Oversight Board (POB) appointed a Panel on Audit Effectiveness (the Panel) to examine the current audit model, including the way independent audits are performed regarding the auditor's consideration of fraud. The Panel provided a "Report and Recommendations" on August 31, 2000, including a number of recommendations addressed to the ASB that concerned earnings management and fraud. The Panel's report is briefly discussed in the section entitled "Additional Background Information." Since the issuance of SAS No. 82, the International Auditing Practices Committee (IAPC) of the International Federation of Accountants has examined the auditor's responsibility to consider fraud and error, resulting in the issuance of a revised International Standard on Auditing (ISA 240) in the spring of 2001. That standard incorporated many of the concepts formulated in SAS No. 82 and provided guidance beyond that included in SAS No. 82. Largely in response to the developments outlined above, the current Fraud Task Force was formed in September 2000. Its objective, reproduced in the section entitled "Additional Background Information," directed the task force to consider the need to revise SAS No. 82 based on the preceding academic research, recommendations from the Panel, and information and recommendations provided by other financial reporting stakeholders. It also instructed the task force to be sensitive to international developments and the long-term need to work toward global audit standard-setting solutions. This important initiative of the ASB and its Fraud Task Force is part of a broader AICPA program to address the growing concerns about fraudulent financial reporting. Although the proposed Statement resulting from this initiative addresses the auditor's effectiveness in detecting material misstatements in financial statements due to fraud, broader efforts are needed focusing not only on the auditor's role, but that of management, the audit committee, regulators, and others in addressing this important issue, and focusing not only on the detection of fraud, but on prevention and deterrence aswell. This proposed Statement does not change the auditor's responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud (as described in AU sec. 110.01). However, the proposed Statement does establish standards and provide guidance to auditors in fulfilling that responsibility, as it relates to fraud. The following is an overview of the content of the proposed Statement: A. Description and characteristics of fraud. This section of the proposed Statement describes fraud and its characteristics, including the aspects of fraud particularly relevant to an audit of financial statements. B. Discussion among engagement personne 11b6 l regarding the risks of material misstatement due to fraud. This section requires, as part of planning the audit, that there be a discussion among the audit team members to consider the susceptibility of the entity to material misstatement due to fraud and to reinforce the importance of adopting an appropriate mindset of professional skepticism. C. Obtaining the information needed to identify the risks of material misstatement due to fraud. This section requires the auditor to gather the information necessary to identify the risks of material misstatement due to fraud, by the following: 1. Making inquiries of management and others within the entity; 2. Considering the results of the analytical procedures performed in planning the audit (The proposed Statement also requires that the auditor perform analytical procedures relating to revenue.); 3. Considering fraud risk factors; 4. Considering certain other information; D. Identifying risks that may result in a material misstatement due to fraud. This section requires the auditor to use the information gathered above to identify risks that may result in a material misstatement due to fraud. E. Assessing the identified risks after taking into account an evaluation of the entity's programs and controls. This section requires the auditor to evaluate the entity's programs and controls that address the identified risks of material misstatement due to fraud, and to assess the risks taking into account this evaluation. F. Responding to the results of the assessment. This section requires the auditor to respond to the results of the risk assessment. This response may include the following: 1. A response to identified risks that has an overall effect on how the audit is conducted, that is, a response involving more general considerations apart from the specific procedures otherwise planned; 2. A response to identified risks that involves the nature, timing, and extent of the auditing procedures to be performed; 3. A response involving the performance of certain procedures to further address the risk of material misstatement due to fraud involving management override of controls (See item 9 in the following section, entitled "How It Affects Practice."). G. Evaluating audit test results. This section requires the auditor's assessment of the risk of material misstatement due to fraud to be ongoing throughout the audit and that the auditor evaluate at the completion of the audit whether the accumulated results of auditing procedures and other observations affect the assessment. It also requires the auditor to consider whether identified misstatements may be indicative of fraud and, if so, directs the auditor to evaluate their implications. H. Communicating about fraud to management, the audit committee, and others. This section provides guidance regarding the auditor's communications about fraud to management, the audit committee, and others. I. Documenting the auditor's consideration of fraud. This section describes related documentation requirements.

ISBN

ed02-02-28

Publication Date

2002

Relational Format

Book

Keywords

Audited financial statements -- Standards -- United States; Attest function (Auditing) -- Standards -- United States; Accountants -- Malpractice -- United States; Fraud

Disciplines

Accounting | Taxation

Comments

Originally published by: American Institute of Certified Public Accountants; Copyright and permission to reprint held by: American Institute of Certified Public Accountants; Exposure draft (American Institute of Certified Public Accountants), 2002, Feb. 28

Proposed statement on auditing Standards: Consideration of fraud in a financial statement audit : (supersedes Statement on auditing standards no. 82, AICPA, Professional Standards, vol. 1, AU sec. 316; and amends SAS no. 1, Codification of auditing standards and procedures, AICPA, Professional standards, vol. 1, AU sec. 230,

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