What the Auditor Needs to Know

pdf

School

Temple University *

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Course

3309 101

Subject

Accounting

Date

Nov 24, 2024

Type

pdf

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Uploaded by naikamit

What the Auditor Needs to Know AU-C 240 of the Auditing Statements requires the auditor to include procedures designed to detect material misstatement of the financial statements and related disclosures. These misstatements can occur at the financial statement level when considering the entity as a whole, or at the individual accounts level (for example, inaccurate inventories). The auditor must be able to properly evaluate the audit evidence to determine whether a material misstatement has occurred. Professional judgment and professional skepticism are part of this process. If the misstatement has been found and it is material, a determination is made to determine whether the misstatement is the result of an error or fraud. The two types of fraud that are the focus of the audit procedures are fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting usually involves a dollar amount and is often used by management to manipulate or smooth earnings. Interestingly, revenues are the target of this type of fraud. Overstating revenue occurs more than 60% of the time. When fraud is suspected or has been determined, the auditor’s role changes to that of an investigator. AU-C 240 describes the procedures when fraud is suspected. As an investigator, we need to determine if the material misstatement was the result of any of the following: ● Fictious journal entries. ● Inappropriately adjust assumptions regarding accounting estimates. ● Omit or advance transaction to another accounting period. ● Omit or misstate disclosures. ● Conceal facts that could affect recorded amounts. ● Engage in complex, misleading transactions. ● Change or modify records related to significant and unusual transactions. The auditor is required to document the audit file and communicate, in writing, and our findings with the appropriate level of management and the audit committee. We may also need to notify regulatory agencies. Does this reporting sound like it could pose an ethical dilemma? Probably. We have a duty to the client to protect their confidentiality and to certain third parties. At this point, it may be prudent to contact the legal counsel for the firm.

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