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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.
The auditor is not responsible for preventing fraud and errors. However, conducting an annual
audit helps prevent such facts.
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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 eventCharacteristic 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
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
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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 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.
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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 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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