Chapter 2

What are the responsibilities of those charged with governance and management when it comes to fraud and non compliance with laws and regulations?

• • Establish procedures which reacts to non-compliance, fraud and error

• • Take steps to see that the entity complies with the relevant laws and its assets are

    safeguarded

• • Establish arrangements which prevent non-compliance, fraud and error

• Prepare financial statements showing a true and fair view

Answer explanation

• The responsibility of those charged with

  governance and management to:

• 1. Take steps to see that the entity complies with the relevant laws and its assets are

  safeguarded;

• 2. Establish arrangements which prevent non-compliance, fraud and error; and

• 3. Prepare financial statements showing a true and fair view.

What are the responsibilities of auditors when it comes to fraud and non compliance with laws and regulations?

• • Not to prevent non-compliance, fraud and error

• • To plan, perform and evaluate their audit work so as to have a reasonable expectation of detecting material misstatements in the financial statements arising from non-compliance, fraud and error

• To detect non-compliance, fraud and error

Answer explanation

1. The responsibilities of the statutory auditor are, therefore:

   • 1. Not to prevent non-compliance, fraud and error; but

   • 2. To plan, perform and evaluate their audit work so as to have a reasonable expectation of detecting material misstatements in the financial statements arising from non-compliance, fraud and error.

Fraud is an _ act while error is an unintentional act.

Answer explanation

Fraud means an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage and which may result in a misstatement in the financial statements. Fraud may involve any of the following:

1. (a)  Manipulation, falsification or alteration of records or documents;

2. (b)  Misappropriation of assets;

3. (c)  Suppression or omission of the effects of transactions from records or documents; and

4. (d)  Recording of transactions without substance.

Error means unintentional mistakes in financial statements, such as the following:

1. (a)  Mathematical or clerical mistakes in the underlying records and accounting data;

2. (b)  Oversight or misinterpretation of facts; and

3. (c)  Misapplication of accounting policies

Below are some of the specific steps listed in the ISA in relation to fraud and non-compliance with laws and regulations except

• • Management written representation

• • Identification and assessment of risk of material misstatement due to fraud

• Detecting the fraud

• • Evaluation of audit evidence

• • Ability to continue the engagement

Answer explanation

3. Specific steps are listed in the ISA in relation to:

• Discussion among the engagement on the following matters:

o An exchange of ideas among engagement team members about how and where they believe the entity’s financial statements may be susceptible to material misstatement due to fraud, how management could perpetrate and conceal fraudulent financial reporting, and how assets of the entity could be misappropriated;

o A consideration of any unusual or unexplained changes in behaviour or lifestyle of management or employees which have come to the attention of the engagement team;

o A consideration of the types of circumstances that, if encountered, might indicate the possibility of fraud;

o A consideration of circumstances that might be indicative of earnings management and the practices that might be followed by management to manage earnings that could lead to fraudulent financial reporting;

o An emphasis on the importance of maintaining a proper state of mind throughout the audit regarding the potential for material misstatement due to fraud.

• • Risk assessment procedures and related activities;

• • Identification and assessment of risk of material misstatement due to fraud;

• • Responses to the assessed risks of material misstatement due to fraud, in particular, audit procedures responsive to risks related to management override of controls;

• • Evaluation of audit evidence;

• • Ability to continue the engagement;

• • Management written representation;

• • Communication to management and with those charged with governance; and

• • Reporting fraud to an appropriate authority outside the entity.

Below are the audit procedures perform to obtain information about the risk of fraud:

• Inquiries of management and others within the entity and those charged with governance

• Discussion among colleagues

• Consideration of fraud risk factors

• • Consideration of unusual or unexpected financial relationships

• • Discussion among the audit team

Answer explanation

6. The auditor performs the following procedures to obtain information about the risks of fraud:

• Inquiries of management and others within the entity and those charged with governance;

o Inquiries of management regarding management’s own assessment of the risk of fraud and the controls in place to prevent and detect it.

o Inquiries of management’s process for identifying and responding to the risks of fraud

o Inquire about specific internal audit activities including, for example: the procedures performed, if any, by the internal auditors during the year to detect fraud or whether management has satisfactorily responded to any findings resulting from those procedures

• Consideration of fraud risk factors;
o incentive/pressure to perpetrate fraud;
o opportunities to commit fraud; and
o attitude/rationalisation to justify committing the fraud.

Appendix 1 of ISA 240 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements provides examples of fraud risk factors that indicate the possibility of fraudulent financial reporting and misappropriation of assets.

• • Consideration of unusual or unexpected financial relationships; and

• • Discussion among the audit team.

Management often _ controls by recording fictitious entries at year-end, manipulating assumptions used in accounting estimates or engaging in complex transactions structured to misrepresent facts.

Audit procedures in response to the risk of management override of internal controls

• Recalculate the journal entries

• Test the appropriateness of journal entries and other adjustments

• Review accounting estimates for biases

• Obtain an understanding of the business rationale of significant transactions

Answer explanation

To respond to the risk of management override of internal controls, the auditor shall perform the following audit procedures:

(a) test the appropriateness of journal entries and other adjustments;

(b) review accounting estimates for biases; and

(c) obtain an understanding of the business rationale of significant transactions..

9. Auditors are expected to address two categories of laws and regulations

• Those that relate directly

• Those that relate indirectly

• Those that provide a legal framework

Answer explanation

9. Auditors are expected to address two categories of laws and regulations:

   • 1. Those which relate directly to the preparation of, or the inclusion or disclosure of specific terms in the financial statements, e.g. the provisions of Companies Act 2016, laws related to income taxes and BNM Guidelines; and

   • 2. Those which provide a legal framework within which the company’s business is conducted and are central to the company’s ability to do business. For example, non-compliance with the Health and Safety Act could have a fundamental effect on the operations of the company and call into question its ability to continue as a going- concern.

It must be remembered that the auditor is not responsible for _ non-compliance and an audit cannot detect non-compliance with all laws and regulations.

What is the rights of Members in appointing auditors for Public Companies?

• To fill casual vacancy

• Before company’s first general meeting at which accounts/financial statements are laid

• Appoint auditor at each general meeting where accounts/financial statements are laid by positive resolution

• Can appoint auditor if no auditor is appointed or re-appointed at general meeting at which accounts/financial statements are laid

Answer explanation

Appoint auditor at each general meeting where accounts/financial statements are laid by positive resolution.

Auditor holds office until the conclusion of the next general meeting at which accounts/financial statements are laid.

Note: This is only applicable for Public Companies. For Private Companies, auditors are deemed to be re-appointed unless the shareholders or members submit an objection at least 30 days before the company’s financial statements arecirculated.