This document discusses fraud, error, and the responsibilities of auditors, management, and internal auditors related to detecting and reporting on financial statement misrepresentations. It defines fraud as intentional acts that misrepresent financial statements, while error refers to unintentional mistakes. Auditors are responsible for deterring, but not preventing, fraud and error. They must evaluate risks and obtain sufficient evidence. Management must implement adequate internal controls and accounting systems to reduce fraud and error risks. Internal auditors can help detect fraud by continually evaluating controls and advising on prevention measures using their deep organization knowledge.

1. CHAPTER 4
FRAUD & ERROR
Fraud – intentional act by one or > individual among mgt,
employee or 3rd
parties, which results in a misrepresentation of
financial statement.
Involve
 Manipulation, falsification or alteration or records &
documents
 Misappropriation of assets
 Suppression/omission of effects of transactions from
records/documents
 Recording of record without substance
 Misapplication of accounting policies
Error – unintentional act or mistakes in financial statements
e.g – mathematical/clerical mistakes underlying records & accounting
data.
Oversight/misinterpretation of facts misapplication of accounting
policies
Withdrawal from engagement
 When the entity does no take
remedial action regarding fraud
that considered material by the
auditor
Procedures where there is an indication
that fraud & error may exists
Responsibilities
Reporting of fraud &
error
Auditors
 Do not held responsibilities for the prevention but deterrent
 Conditions which high risk of fraud & error
 Questions with respect to the integrity/competence of management
 Unusual pressures with in/on an entity
 Unusual transactions
 Problems in obtaining sufficient appropriate audit evidence
Management
 Implementation & continuing operation of adequate accounts & internal control system
 Installing an effective accounting system.
 Establishing an effective internal control system.
 Establishing an internal audit function.
 Appointing audit committee
 Establishing and implementing code of conduct among the employee and
management
 Do not eliminate but reduce
 Depends on auditor’s judgment
 The types of fraud & error indicated
 The likelihood of their occurrence
 The likelihood that a particular type of
fraud/error could have a material effect
on the financial statements
To management
 Factual findings insignificant of the level of
immaterial/existence of the error
 Auditor would consider all the circumstances
To users of the Auditor’s report on the
financial statements
 Material effect & no correction has been
made (qualified/adverse opinion)
 Obtain sufficient audit evidence to
evaluate material problems
(qualified/disclaimer)
 Unable to determine due to limitation
imposed. The auditor should consider the
effect on the audit report.
To regulatory & enforcement auditors
 Legal advice when duty of
confidentiality is overridden by statute,
law/courts.
Internal auditors
 to detect fraud as they have a continual presence in the organization,
hence have a better understanding of the organization and its control
systems.
 can assist management in
 deterrence of fraud by examining and evaluating the adequacy and
the effectiveness of internal controls
 establishing effective fraud prevention measures by knowing the
organization’s strengths and weaknesses and providing consulting
expertise.