INTERNATIONAL JOURNAL OF ARTIFICIAL INTELLIGENCE
ISSN: 2692-5206, Impact Factor: 12,23
American Academic publishers, volume 05, issue 05,2025
Journal:
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AUDITOR'S RESPONSIBILITIES IN REVIEWING FRAUD AND ERRORS
Yuldasheva Saodat Khalmurzaevna
PhD and associate professor at International School of Finance
Technology and Science, department of “Accounting”
Abstract:
The article is devoted to current issues, the auditor's responsibility when
considering fraud and errors related to the organization and the industry. The auditor should
get an idea of the subject's compliance with these regulations. Particular attention should be
paid to laws and regulations that may affect the organization's activities.
Key words:
risk assessment, ethical standards, compliance with legal requirements, economic
entity, auditor's responsibility, internal standards, controls, inherent risk.
Introduction
International practice permits the current auditor of an entity to inform the auditor
who has been invited to perform the audit that there are professional reasons why the auditor
who has received an offer to perform the audit should decline to accept it. In doing so, the
ethical standards and legal restrictions existing in each individual country should be taken
into account. In addition, the current auditor should obtain the client's permission to discuss
the client's affairs with the auditor who has received an offer to perform the audit.
Procedure for considering cases of fraud and error.
International Standard 240 "The Auditor's Responsibilities for Considering Fraud and
Error During an Audit of Financial Statements" regulates the responsibilities of the auditor.
The standard includes the following sections: introduction, limitations inherent in an audit,
procedures performed when there is an indication of fraud or error, reporting the fact of fraud
or error, refusing to conduct an audit.
The term "
fraud
" means an intentional act committed by one or more persons,
whether officers or employees, of an organization or by third parties, that results in the
incorrect presentation of financial statements. The following acts are considered to be fraud:
•
manipulation, falsification, alteration of records or documents;
•
misappropriation of assets;
•
concealment or omission of transactions in records or documents;
•
recording non-existent transactions;
•
improper application of accounting policies.
The term "
error
" refers to unintentional errors in financial reporting. The following
actions are considered to be errors:
• mathematical errors or typographical errors in accounting records or data;
• omissions of facts or their incorrect interpretation;
• incorrect application of accounting policies.
The standard distinguishes between the responsibilities of management and the
auditor in preventing and detecting fraud and error.
The responsibility for preventing and detecting fraud and errors rests with the
management of the organization. The management of the organization is obliged to organize
and ensure the effective operation of accounting and internal control systems. However, these
systems cannot completely eliminate the possibility of fraud and errors.
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The auditor is not responsible for preventing fraud and errors. However, conducting
an annual audit helps prevent such facts.
In the process of planning and conducting an audit, the auditor must assess the risk of
material misstatement of the financial statements as a result of fraud or error. For this purpose,
he must request information from the management of the organization about all previously
discovered fraud and errors.
There are a number of conditions and events that may increase the risk of fraud and
errors:
• doubts about the integrity and/or competence of the organization's management;
• unusual internal and external pressures;
• unusual transactions;
• problems with obtaining sufficient and appropriate audit evidence, etc.
Examples of conditions and events that increase the risk of fraud and errors are
provided in Table 1.1.
Table 1.1.
Examples of conditions or events that increase the risk of fraud or error
Type of condition or
event
Characteristic of a condition or event
Doubts about the integrity
and/or competence of the
organization's management
•
The organization is managed by one person, there is no board or
oversight committee
•
The organization has a complex, ineffective corporate structure
•
There are significant deficiencies in the internal control system that
are not being addressed
•
There is a high turnover of accountants, financiers, legal advisers
and auditors
•
The accounting department is understaffed
Unusual
internal
and
external pressure
•
There is a decline in the industry and an increase in bankruptcies
•
Insufficient working capital due to a decrease in profits or rapid
expansion of production
•
Investment in the development of the industry or expansion of the
product range
•
Dependence of the organization on one or more types of products or
customers
•
Financial pressure on the organization's managers or pressure on the
accounting staff in connection with the preparation of financial
statements in a short time
End of table. 1.1
Type of condition or event Characteristic of a condition or event
Unusual operations
•
Unusual transactions that have a material effect on revenues
•
Complex transactions or accounting methods
•
Related party transactions
•
Excessive fees for legal, advisory or agent services compared to
the services rendered
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Problems
in
obtaining
sufficient and appropriate
audit evidence
•
Irregular accounting entries, large number of adjustments and
corrections in accounting, off-balance sheet accounts
•
Insufficient documentary evidence of transactions
•
Inconsistencies in accounting records and third-party
confirmations
•
Evasive or unreasonable responses from management to auditor's
questions
Problems with the use of
computer
information
systems
•
Lack of necessary information due to lack of documents or
outdated programs
•
Changes in programs that are not documented, approved or
verified
•
Inconsistency between computer operations and databases and
financial statement figures
The auditor's actions should be aimed at providing reasonable assurance that fraud and
errors have generally been detected. To this end, appropriate audit procedures should be
designed. The result of these procedures should be the collection of sufficient and appropriate
audit evidence confirming:
•
the absence of fraud and errors;
•
the effects of fraud are properly reflected in the financial statements;
•
the correction of errors.
Experience shows that the probability of detecting facts of errors is higher than the
probability of detecting cases of fraud. This is due to the actions of the organization's
management, which, as a rule, are aimed at concealing facts of fraud. Such actions include:
•
collusion;
•
forgery of documents;
•
deliberate failure to reflect transactions;
•
deliberate submission of incorrect information to the auditor.
When considering fraud and error, the limitations inherent in an audit apply: there is
an inherent risk of not detecting a material misstatement of the financial statements arising
from fraud. This also applies to errors, but to a lesser extent. Detection risk is not related to
compliance with audit policies and procedures. Compliance with the policies and procedures
is evidenced by the adequacy of the audit procedures and the conformity of the auditor's
report with the established requirements.
In general, the auditor should plan and perform the audit with a attitude of
professional skepticism. This means that conditions and events may be identified that indicate
the presence of fraud and error.
Having well-functioning accounting and internal control systems reduces the
likelihood of fraud and errors. However, internal control systems are not always effective.
Moreover, accounting and internal control systems may not be effective against fraud
committed by the organization's management or by collusion between employees. Sometimes,
managers at a certain level deliberately ignore control procedures that could prevent fraud by
other employees of the organization. For example, they may order subordinates to incorrectly
record transactions, hide them, or conceal information.
To detect fraud or errors that have a material effect on the financial statements, the
auditor must perform appropriate modified or additional procedures. The extent of such
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ISSN: 2692-5206, Impact Factor: 12,23
American Academic publishers, volume 05, issue 05,2025
Journal:
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page 637
procedures depends on:
•
the type of fraud or error;
•
the likelihood of their existence;
•
the degree of significance of the impact of fraud or error on the financial statements.
Modified or additional procedures may enable the auditor to confirm or refute fraud or
error. If the auditor's suspicions of such facts have not been refuted, the auditor should
discuss the matter with the organization's management. In addition, the auditor should
analyze the fraud and error facts from the point of view of their reflection and correction in
the financial statements, and assess the possible consequences for the auditor's report.
The implications of fraud and error for the reliability of management representations
should also be considered. The auditor should review the risk assessment and reliability of
management representations in the following cases:
• if the internal control system does not detect fraud or error;
• if fraud or error is not reflected in management representations.
The auditor may report fraud and error:
•
the organization's management;
•
users of the auditor's report on the financial statements;
•
regulatory authorities and law enforcement agencies.
The auditor must report
fraud and errors to the organization's management in two
cases:
•
if there is a suspicion that fraud has been committed, even if its consequences are not
material to the financial statements;
•
if fraud or a material error exists.
The standard specifies that it is appropriate for the auditor to inform the managers
occupying a higher position in the organizational structure of the economic entity. If persons
responsible for the general management of the entity's activities are involved in the
commission of fraud, the auditor seeks advice from a lawyer to coordinate his actions.
The auditor must express a conditionally positive or negative opinion to users of
financial statements. The auditor's report reflects:
•
the materiality of the effect of fraud or error on the financial statements;
•
the improper recognition or correction of fraud or error in the financial statements.
If the auditor is limited in obtaining sufficient and appropriate audit evidence, the
auditor should express a qualified opinion or disclaim an opinion on the financial statements
based on a scope limitation.
The auditor may report fraud or error to regulators and law enforcement agencies
under certain circumstances. These circumstances relate to compliance with law and court
orders. In such situations, the auditor may consult with legal counsel.
The auditor may decide to disengage from the audit if the entity fails to take the
corrective action for the fraud that the auditor believes is necessary in the circumstances,
even if the effects of the fraud are not material to the financial statements. One reason that
may influence the auditor's decision is if the entity's senior management is suspected of
engaging in fraud, which may cast doubt on the reliability of management's representations
and, accordingly, cause the auditor to decline to continue to engage with the entity.
Conclusion
The application of this standard to public sector entities has its own particularities.
The nature and extent of the audit may be affected by various laws and regulations
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ISSN: 2692-5206, Impact Factor: 12,23
American Academic publishers, volume 05, issue 05,2025
Journal:
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page 638
concerning the detection of fraud and error, which may limit the auditor's own professional
judgment. Moreover, the use of public funds implies that fraud issues should be given greater
attention. In doing so, the auditor must be more careful and consider public expectations
regarding the detection of fraud.
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