“ The Cohen Commission stated in its 1978 report that ‘significant percentages of those who use and rely on the auditor’s work rank the detection of fraud among the most important objectives of an audit.’”
“ The public did not understand how a company can fail as a results of management fraud shortly after an unqualified audit report on its financial statements is issued.”
“ However, interpretations of these standards seemed to emphasize the limitations of the auditor’s role, and in applying the standards, searching for and detecting fraud was always seen as a by-product of the audit process.”
“ In 1988 , the ASB issued two standards … which directly address the auditor’s responsibility for fraud detection ….”
“ In December 1995 , the Congress enacted the Private Securities Litigation Reform Act of 1995 .”
Section 301 of the Act concerns fraud detection and identifies the procedures, evaluations, and reporting the auditor is required to make in accordance with GAAS, as may be modified or supplemented by the SEC.”
“The new standard supersedes SAS no. 16 , The Auditor’s Responsibility for the Detection of Errors and Irregularities ( January 1977 ), which required the auditor to plan the audit to search for material misstatements .”
“In its March 1993 report, In the Public Interest , the Public Oversight Board … made a number of recommendations about fraud, including issuing a call for auditors to exercise the professional skepticism demanded by SAS no. 53 .”
“The ASB concluded that it was crucial to develop a SAS that focused solely on financial statement fraud.”
“ SAS no. 82 , Consideration of Fraud in a Financial Statement Audit , provides expanded operational guidance on the auditor’s consideration of material fraud in conducting a financial statement audit.”
“ The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether caused by error or fraud.”
Two types of misstatements are relevant to the auditor’s consideration of fraud—misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.
The auditor should conduct the engagement with a mindset that recognizes the possibility that a material misstatement due to fraud could be present, regardless of any past experience with the entity and regardless of the auditor’s belief about management’s honesty and integrity.
In exercising professional skepticism in gathering and evaluating evidence, the auditor should not be satisfied with less-than-persuasive evidence because of a belief that management is honest.