Currently, three different standard setters promulgate auditing standards, the AICPA, PCAOB and IAASB. The outcome of the project was two essays comparing the relevant auditing standards from these standard setters.

1. Md Moniruzzaman
A 514: Essay 2: Fraud under AICPA, PCAOB and IAASB
Introduction: My selected topic for this essay is “Fraud in a Financial Statement
Audit”.Discussion and comparison of auditor’s responsibilities will be carried out in this
essay among audit standards set by American Institute of Certified Public Accountants
(AICPA), Public Company Accounting Oversight Board (PCAOB) and International
Auditing and Assurance Standards Board (IAASB). AU-C 240 is the sampling standard
set by AICPA where AU 316 is by PCAOB and ISA 240 is by IAASB.
Statements on Auditing Standard AU-C Section 240 by AICPA - Consideration of
Fraud in a Financial Statement Audit: AU-C 240 was in effect since the financial
statement audit of December 15, 2012. This SAS describes and addresses the issues
involving understanding and assessing the risks of material misstatements to responding to
those material misstatements due to fraud. Unintentional misstatements are error while
intentional misstatements are fraud. However, the interesting thing is, even though auditor
suspects that there might be fraud, they never make the judgment that it was a fraud.1
AU-C 240 affirms that even though auditor’s duty is to obtain a reasonable assurance that
the financial statements as a whole are free from material misstatement, whether caused by
fraud or error, it is the duty of management to prevent and detect it. The section describes
the objectives of the auditor, defines the relevant terms well, and identifies the requirements
of an audit. The procedure of identifying and assessing the level of risks are described in
details in paragraph .25. The section specially put emphasis on professional skepticism.
Whenever there is any misstatements, auditor should look for evidences whether there was
any fraud or not and the management was involved or not with the fraud.2 If there is any
severe case, auditor may plan to withdraw from the engagement and the responsibilities in
that case are described in paragraph .38. Auditor should determine whom to report the
identified fraud at the first level and if there is any necessity to report the fraud to regulatory
authority. The auditor should keep enough documentation for the possible or identified
fraud to back up her conclusion.3 The AU-C 240 section describes also the characteristics
and intensity of fraud from paragraph .A1 to .A6. The section also suggests some of the
common places like accounting estimation look for possible misstatements or frauds.
Finally, the section suggests some specific response in relation to misstatement or fraud of
specific situations like revenue recognition, inventory quantities, management estimates,
and misappropriations of assets.
PCAOB Interim Standards AU 316 - Consideration of Fraud in a Financial Statement
Audit: Superseding SAS no 82, this SAS was in effect since December 15, 2002. This
1 Paragraph .03, AU-C Section 240: Consideration of Fraud in a Financial Statement Audit,
AICPA
2 Paragraph .36, AU-C Section 240: Consideration of Fraud in a Financial Statement Audit,
AICPA
3 Paragraph .43, AU-C Section 240: Consideration of Fraud in a Financial Statement Audit,
AICPA

2. Md Moniruzzaman
A 514: Essay 2: Fraud under AICPA, PCAOB and IAASB
section starts with the reference of AU section 110 about the responsibilities and functions
of the independent auditor. The section describes the types and characteristics of fraud in
details. It put emphasis on the professional skepticism. This section requires the discussion
among the audit team members to discuss the possible places for misstatements or fraud.
Material misstatement due to fraud should be identified by inquiring of management,
considering the results of the analytical procedures, considering fraud risk factors and other
relevant factors. 4 It describes the cases when to withdraw the engagement and whom to
and when to report the fraud. The first place to report the fraud is those charged with
governance or management. It includes the separate responsibility of management and the
auditor in detecting and in preventing the material misstatements or fraud. There are two
types of frauds as per this section: misstatements arising from fraudulent financial reporting
and misstatements arising from misappropriation of assets.5 Fraud triangle-
Pressure/Incentive, Opportunity and Rationalize is the primary condition of occurring a
fraud. Those are described in details. It suggests that some of the personnel of the
management must be involved in the process of doing fraud if there is any and there are
some certain conditions that indicates the presence of fraud. 6 Auditors are responsible for
the planning and performing the audit. Even though an audit is effective for detecting an
error may be ineffective for detecting fraud.7 Using professional judgment the type of risk,
significance of the risk, likelihood of the risk, and pervasiveness of the risk should be
determined. 8 AU 316 suggests that revenue is one item that is a largely susceptible for
fraud. There is always a chance of improper revenue recognition.9 The section ends with a
couple of guidelines for auditing in the attachment.
International Standard on Auditing 240: the auditor’s responsibilities relating to
fraud in an audit of financial statements by IAASB: Like other ISA, this ISA starts with
a scope paragraph. It clearly defines the fraud as an intentional act by one or more
individuals among management, employees, or third parties, by deception to obtain an
unjust or illegal advantage.10 Describing the characteristics of fraud, it describes the
responsibility of for the prevention and detection of fraud. It is stated that the prevention
and detection of fraud is the responsibility of management. 11 Defining the responsibilities
of the auditor in detection, it extends that some material misstatements of the financial
statements may not be detected, even though the audit is properly planned and performed
in accordance with the ISAs.12 Paragraph 6 describes that the undetected fraud might be
4 Paragraph .02 AU section 316, PCAOB
5 Paragraph .06 AU section 316, PCAOB
6 Paragraph .11 AU section 316, PCAOB
7 Paragraph .12 AU section 316, PCAOB
8 Paragraph .40 AU section 316, PCAOB
9 Paragraph .41 AU section 316, PCAOB
10 Paragraph 11 ISA240, IAASB
11 Paragraph 4 ISA 240,IAASB
12 Paragraph 5 ISA 240,IAASB

3. Md Moniruzzaman
A 514: Essay 2: Fraud under AICPA, PCAOB and IAASB
much more risky than the prior undetected error. Moreover, fraud committed by
management rather than mere employees is much more risky. Auditor must have to apply
professional skepticism as per this ISA. Discussion among the engagement team, risk
assessment procedures these are described in the similar fashion of GAAS and PCAOB
standards. It states that in determining fraud and misstatements, auditor should assign and
supervise competent person to detect them. If frauds or misstatements are assessed in the
assertion level, the auditor shall design and perform further audit procedures.13 Even
though there is no assessed risk, the auditor should perform audit procedures in relation to
journal entries recorded in the general ledger and other adjustments made in the preparation
of the financial statements, accounting estimates, and other significant transactions.14
Inability to continue the engagement is also discussed in depth. Written representation of
management is required as per the requirement of this ISA. Documentation should be
sufficient in support of the work done. The ISA ends with some specific responses for
specific situations.
Comparison: As PCAOB and AICPA standard do not have major differences, discussion
is focused on AICPA and ISAAB standards.
ISA 240, Compared to AU-C Section 240 and their impact on auditing:
Differences in Language
Paragraph 11 of ISA 240 and paragraph .11 of section 240 define fraud. However, the
definition of fraud in paragraph .11 of section 240 was changed by the words “to obtain
illegal or unjust advantage” to “results in a misstatement in financial statements that are
the subject of an audit.” The definition in ISA 240 is too broad and could inappropriately
expose auditors to additional liability in the United States, and the meaning of unjust could
be interpreted very broadly and subjectively in its application and could imply a scope well
beyond the intent of the standard. But, the change in the definition does not create
significant differences between the application of ISA 240 and the application of section
240.
Requirements in GAAS Not in the ISAs
Section 240 contains requirements, consistent with requirements of SAS AU 316,
Consideration of Fraud in a Financial Statement Audit, as amended, that have been
expanded from the requirements of ISA 240, or elevated from application material in ISA
240, as follows:
13 Paragraph 30 ISA240, IAASB
14 Paragraph 32 ISA240, IAASB

4. Md Moniruzzaman
A 514: Essay 2: Fraud under AICPA, PCAOB and IAASB
 The requirement in paragraph 14 of ISA 240 for the auditor to investigate
inconsistent responses to auditor inquiries of management or those charged with
governance has been expanded in paragraph .14 of section 240 to also include
responses that are otherwise unsatisfactory (for example, vague or implausible
responses).
 The requirement in paragraph 44 of ISA 240 to document the significant decisions
reached during the discussion among the engagement team regarding fraud-related
matters has been expanded in paragraph .43 of section 240 to also require
documenting how and when the discussion occurred and the audit team members
who participated.
 The requirements in paragraph 32(a) of ISA 240 address designing and performing
auditing procedures to test the appropriateness of journal entries. That was absent
in AU-C 240.
 The requirement for the auditor to design and perform auditing procedures to
review accounting estimates for biases and evaluate whether the circumstances
producing the bias, if any, represent a risk of material misstatement due to fraud, in
paragraph 32(b) of ISA 240, has been expanded in paragraph .32b of section 240
to include those estimates that are based on highly sensitive assumptions.
Conclusion: Even though there are some minor differences between these three standards,
the standards for fraud is almost same in all the three cases.