J.K. Asenso is a member of a team auditing the financial statement of Sascraku Co. Ltd for the year ended 31 December 2017. Shortly after the end of the audit, the media made an allegation of fraudulent activities with the aim of reducing tax liability against the company. A committee was appointed by Ghana Revenue Authority (GRA) to examine the books of the company to substantiate the allegations.
The committee discovered the following anomalies:
- Diverting receipts to private bank accounts;
- Stealing physical assets or intellectual property;
- The entity paid for goods that had not been received;
Assets had been used for personal purposes.
The directors were not happy with the work of the auditors due to their inability to discover the above anomalies.
Required:
i) Explain the responsibility of the Auditor with respect to detection and prevention of fraud. (5 marks)
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- The primary responsibility for prevention or discovering of anomalies is of those charged with governance and the management of the entity.
- The management designs and operates accounting and internal control systems to discharge this responsibility.
- The responsibility of those charged with governance will be to ensure the integrity of the entity’s accounting and financial reporting system and appropriateness of established controls.
Responsibilities of Auditor - Obtain reasonable assurance – a financial audit is conducted by the auditor to obtain reasonable (not absolute) assurance that the financial statement are free from material misstatement caused by fraud and error.
- Cleverly concealed frauds are difficult to detect -Due to certain inherent limitations, even an audit which is properly planned and performed in accordance with generally accepted auditing standards, may fail to detect a cleverly concealed fraud.
This particularly happens in cases of fraud involving forgery or collusions among employees or management or those charged with governance. The auditor, thus, cannot be held responsible for the prevention and detection of those anomalies. - Consider risk of material misstatements- The term reasonable assurance implies that some risk of material misstatement could be present in the financial statement and the auditor will fail to detect it. Therefore, he should consider the risk of material misstatement resulting from fraud or error during all the stages of audit process.
ii) Outline the audit procedures that the auditors should have adopted to detect the above anomalies. (5 marks)
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- Examining journal entries and other adjustments
The auditor’s understanding of the entity’s financial reporting process, including automated and manual procedures used to prepare financial statements and related disclosures, and how misstatements may occur. - Reviewing accounting estimates for bias
The auditor must perform a retrospective review of significant prior-year estimates for any potential bias that might signal inappropriate earnings management (for example, recorded estimates clustered at one end of an acceptable range in the prior year and at the other end of an acceptable range in the current year). - Evaluating the business rationale for significant unusual transactions
Although the auditor typically gains an understanding of significant transactions, the auditor should place a greater focus on understanding the underlying business rationale for significant unusual transactions. In this context, unusual transactions are those that come to the auditor’s attention that are outside the normal course of business for the company or that otherwise appear unusual.