Disclosure
of Fraud in Auditor's Report – New requirement of ISA 700
ISA 700 disclosures on Fraud are
applicable on all accounting periods commencing from 15.12.2019. i.e. For all
accounting years ending on 31.12.2020 and 31.03.2021. It was mandatory for
PIE’s and is now made applicable to all entities. The actual wordings of ISA
700 vis-à-vis the write-ups available on the net, understanding of the
regulators and drafts provided by various authorities are creating ambiguity on
the actual requirement, its applicability, and its position in the Auditor’s
Report.
My prima facie view, based on
plain reading of ISA 700 would be it’s Fraud reporting related to Going Concern
or it’s Fraud Reporting for companies forming part of groups subject to audit. I
have formed my conclusion based on facts stated below:
1. Fraud
reporting disclosure is in the main body of ISA 700 only at para 29-1, where
para 29 relates to Going Concern.
2. Fraud
reporting disclosure is also stated in the explanatory notes to the ISA 700 in
para A39-3 to A39-5, wherein para A38 & A39 only relate to Conditions specific
to Group Audit
3. Appendix
1 of FRC Bulletin is only for Small Companies as stated in its heading. Since
small companies are audit exempt, it’s very clear that the intention of the FRC
to provide disclosure on Fraud under Auditors Responsibilities would only be applicable
to those companies, which are part of a medium or large group or ineligible
group.
4. If
the intention of the legislation was to make it mandatory for all companies,
then they should have mentioned Fraud reporting disclosure under a separate
para in the main body of ISA 700. Further, if they wanted it to be disclosed
under auditors’ responsibilities (as suggested by FRC’s bulleting) then such
separate para number should be between 37 and 42 which provides requirement of
Auditors responsibilities.
I have raised my concerns with
the Technical advisory team and await clarification. In the meantime, will have
to go with the tide. Have drafted Fraud disclosures applicable to small
companies covering the approach as well as the response to the risk assessed on
irregularities and Fraud. Have positioned it in such a way that it would not
only avoid placing it under Auditors Responsibilities but also assist fellow
accountants to disclose it correctly through the limited insert options offered
by accounting software companies.
Auditors' responsibilities for
the audit of the financial statements
Our objectives are to obtain
reasonable assurance about whether the financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue a
Report of the Auditors that includes our opinion. Reasonable assurance is a high level of
assurance but is not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when it exists.
Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to
influence the economic decisions of users taken on the basis of these financial
statements.
A fuller description of our
responsibilities is provided on the Financial Reporting Council's website at
www.frc.org.uk/auditorsresponsibilities.
Our approach to assessing the
risk of material misstatement due to irregularities including Fraud
- we identified the laws and
regulations applicable to the company through discussions with management and
also used our industry and sector experience;
- we focused on specific laws and
regulations which we considered may have a direct material effect on the
financial statements or the operations of the company, UK Government COVID 19
Support Scheme, UK General Data Protection Regulation, the Companies Act 2006,
the Corporation Tax Act, UK anti-money laundering regime, employment and health
& safety legislation;
- we ensured that the engagement
team collectively had the appropriate competence, capabilities and skills to
identify or recognise non-compliance with the applicable laws and regulations;
- identified laws and regulations
were communicated within our team and we remained alert to any indications of
non-compliance throughout the audit;
- we assessed the extent of
compliance with the laws and regulations identified above through making
enquiries with Directors and management;
- considered the internal
controls in place to mitigate risks of fraud and non-compliance with laws and
regulations; and
- we also made enquiries with
Directors and management as to where they considered there was susceptibility
to fraud, their knowledge of suspected. actual and alleged fraud.
Responding to the risk of
material misstatement due to Fraud
To respond to the identified risk
of material misstatement due to fraud we assessed events and conditions that
could indicate an incentive or pressure to commit fraud or provide an
opportunity to commit fraud. We implemented following risk assessment procedures:
- journal entries were
scrutinised to identify significant or unusual transactions and investigated the
rationale behind those transactions;
- assessed whether judgements and
assumptions made in determining the accounting estimates were indicative of potential
bias; and
- performed analytical procedures
to identify any unusual or unexpected relationship.
Responding to the risk of
material misstatement due to non-compliance with the Laws and Regulations
We implemented the following risk
assessment procedures:
- agreeing financial statement
disclosures to underlying supporting documentation;
- reading Board minutes; and
- enquiring of management as to
actual and potential litigation and claims.
Ability of the audit to detect
fraud or breaches of the Laws and Regulations
Owing to the inherent limitations
in an audit, there is an unavoidable risk that we may not have detected some
material misstatements in the financial statements even though we have planned
and performed the audit in accordance with the auditing standards. Material
misstatements that arise due to fraud can be harder to detect than those that
arise from error as they may involve deliberate concealment, forgery, collusion,
misrepresentation, or intentional omission.
Our audit procedures are planned to detect material misstatements. We are not responsible for preventing fraud or non-compliance and cannot be expected to detect non-compliance with all laws and regulations.
