5510 Evaluation of Audit Evidence to Identify Previously Unrecognized Risks of Fraud

Jun-2020

OAG Guidance

See OAG Audit 5511 for examples of circumstances that indicate the possibility of fraud.

Evaluating audit test results

Our assessment of the risks of material misstatement due to fraud is ongoing throughout the audit. Conditions may be identified during the performance of fieldwork that change or support our judgements regarding our assessment, such as discrepancies in accounting records, conflicting or missing evidential matter, or problematic or unusual relationships between the engagement team and the client.

We consider if responses to inquiries about analytical relationships were inconsistent or vague in comparison with other audit evidence. As part of this evaluation the engagement leader verifies that there has been appropriate communication among engagement team members throughout the audit.

At or near the completion of the audit, evaluate whether the accumulated results of audit procedures and other observations affect the assessment of fraud risk made earlier in the audit, and whether there is a need to perform additional or different audit procedures. This evaluation primarily is a qualitative matter based on our judgment. In addition, update the revenue analytics performed as part of our risk assessment analytical procedures. If financial benchmarking was performed, consider updating the analysis with the latest available information.

We cannot assume that an identified misstatement is an isolated occurrence. Consider whether such misstatements might be indicative of a higher risk of material misstatement due to fraud at a specific location and consider the implications in relation to other aspects of the audit, particularly the reliability of management representations.

See related guidance on risk assessment, OAG Audit 5033 and OAG Audit 5010.

OAG Guidance

For more guidance on the use of Internal Specialist for Fraud, see OAG Audit 5513.

At any time direct evidence of fraud or other grounds for suspecting that a fraud has or may have taken place may come to light in any one or more of a variety of ways. These include:

• Concerns raised by a member of the engagement team.
• Concerns raised openly by a member of entity management or staff.
• An anonymous tip-off from someone within or outside the entity.
• Notification to us as well as to the Audit Committee of any fraud detected by management, whether or not material, that involves management or other employees who have a significant role in the entity’s internal controls.
• Indications contained in one or more items of audit evidence examined in the course of the audit.
• Failure to timely respond to our concerns regarding disclosure of control matters.
• Extraneous circumstances or events media comment, law enforcement or regulator action, etc.

When our work indicates that fraud has or may have taken place, the engagement leader may involve an Internal Specialist for Fraud in determining the appropriate course of action to be taken, for example with regard to:

• The most appropriate approach to determine the full facts and extent of the fraud and its impact on the financial statements.
• The communication of the problem and of recommendations for dealing with it to the client.
• Wider legal and regulatory issues.
• Remedial and asset recovery options.

The engagement leader, with the support of Internal Specialist for Fraud, verifies that sufficient additional work is carried out either to ascertain the impact of the fraud on the financial statements, or to gain reasonable assurance that there is no material impact.

Actual and potential magnitude, nature, extent of concealment, and management of staff involved are all factors to consider when determining the action necessary in a particular instance.

Where the entity agrees to extend the scope of our work to include an investigation of an expected or known fraud (rather than performing such investigation themselves or engaging another firm to do so), such investigation is carried out by or under the direction of fraud experts, and is agreed upon with the Audit Committee. This may include, amongst other activities, some or all of the following:

• Securing evidence and gathering information, including the use of computer fraud techniques, where appropriate.
• Interviewing relevant entity staff and, possibly, third parties.
• Document and data analysis using a variety of fraud techniques.
• Evidence collation and management.
• Advising on potential courses of action.
• Reporting on findings in a form appropriate to the facts of the case and the addressee of the report (management, regulators, police, etc.).
• Liaison throughout with the entity’s legal advisers.
• Liaison with regulators and/or law enforcement authorities.
• Where applicable, Internal Specialist for Fraud may also provide assistance in identifying and implementing appropriate remedial steps both to recover misappropriated assets and to mitigate the risks of future recurrences.

Unless circumstances clearly dictate otherwise, a fraud investigation is carried out under a separate letter of engagement in order to distinguish the scope and objectives of the investigation from those of the audit and to enable appropriate limitations of liability to be put in place.

In situations when adequate information about a suspected act of fraud cannot be obtained, consider the effect of the lack of evidence on our audit report. If we conclude that the effect of the suspected act of fraud on the financial statements might be material, consider expressing a qualified or adverse opinion. If we are precluded by the entity from obtaining sufficient appropriate audit evidence to evaluate whether fraud that may be material to the financial statements has occurred, consider qualifying our opinion on the basis of a scope limitation, or deny any opinion on the financial statements.

Also consider whether the circumstances surrounding the fraudulent act affect our ability to rely on management’s representations or suggest that we not continue our association with the entity. In reaching decisions on these matters, evaluate carefully whether top management (including the Board of Directors or its Audit Committee) gives appropriate consideration to the act after it has been brought to their attention.

OAG Guidance

For related guidance on cessation of engagements refer to OAG Audit 3011.

OAG Guidance

See OAG Audit 9050 for related guidance on written representations.

We may want to consider written representation from the Audit Committee if any of the investigations that are under their oversight pertain to either senior management or others having a significant role in the internal controls over financial reporting.