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Dear sir,
1) Can we say that as per ISA 240, the auditor’s role is “bloodhound” and not “watchdog”. Please comment and give some examples.
2) Please confirm that auditor is still responsible for detecting only material frauds and errors with some exceptions of collusion and management override of internal controls for AAA exam.
3) Can we say that an immaterial fraud may not be detected by audit procedures, as auditor will use sampling on material balances and transactions.
Thanks and regards,
1. See Chapter 8 (s,2) – this old analogy is not examinable but simply summarises the idea that management has primary responsibility – so the auditor is NOT the bloodhound (detective) but the watchdog.(that acts in the interests of the owners/shareholders).
2. The auditor plans to detect material misstatements whether due to fraud or error. Collusion and management override are examples of high risk factors – they do not exempt the auditor from planning the audit to detect material fraud. Fraud invariably involves deception which is why, if the auditor were to fail to detect a material misstatement, it would a court that has to decide whether the auditor was negligent in planning and performing the audit.
See in the auditor’s report on page 113:
“The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.”3. Yes – for all the same reasons that the auditor does not detect all immaterial errors.
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