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You are the audit manager responsible for planning the audit of Rottnest
Co. During the planning of the audit you have identified an increased
risk of material misstatement due to fraud. The audit strategy and audit
plan reflect this increased risk.1 Which of the following statements regarding fraud is TRUE?
A The auditor may not detect all material fraud in the financial statements but this won’t necessarily mean the auditor has been negligent due to the nature of fraud and the likelihood of concealment
B The auditor must detect all material fraud in the financial statements
C The auditor must detect every fraud in the financial statements
D The auditor is not responsible for detecting fraud as this is management’s responsibilityThe answer as per the textbook is Option D. I want to ask why could it not be Option A – since It is not the duty of the auditor to prevent or detect fraud. The auditor should, however, conduct the
audit in such a way as to expect to detect any material misstatements in the financial statements,
caused by fraud?!Welcome to my forum! Good question – but please see page 30 of our notes:
“The auditors’ responsibilities are to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to FRAUD or error …”So the auditor would not be negligent for failing to detect a fraud that is not material, but would be negligent for failing to plan and perform an audit that failed to detect material misstatement arising from fraud (ISA 240 and ISA 315).
In short, the auditor is not responsible for detecting fraud (D is correct) but is responsible for detecting material misstatement and therefore liable for not detecting material misstatement (A is incorrect).
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