Acca aaa s21 Notes

FRAUD, ERROR, THE EVALUATION OF 
MISSTATEMENTS AND REPORTING 
CONTROL WEAKNESSES
1. Definitions
Fraud 
is an intentional act, involving deception, to obtain an unjust or illegal advantage. 
Fraud can be:
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Fraudulent financial reporting. For example, overstating profits to attract investors and lenders.
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Misappropriation of assets. For example, the theft of cash, inventory or non-current assets.
Error 
is an unintentional misstatement, including omission, of an amount or disclosure in financial 
statements.
Misstatement 
is a difference between what is reported and what should be reported (eg in 
accordance with IFRS). A misstatement can be caused by either error or fraud. A misstatement can be:
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An incorrect amount.
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Incorrect classification or presentation.
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Incorrect disclosure.
2. Fraud
It is management’s responsibility to prevent and detect fraud – not the auditor’s. It is management’s 
responsibility to ensure that there is an effective system of internal control as this will greatly decrease 
the risk of fraud and increase the likelihood of detecting fraud. Auditors are not expected to find every 
fraud, but they are expected (with reasonable assurance) to find material misstatements, whether 
innocent or fraudulent. They are expected to exercise professional scepticism and to follow up any 
suspicions that they might have, for example if the results of analytical procedures do not make sense. 
Once a suspected fraud or error is discovered the auditor must perform more audit work, such as:
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Discovering how the fraud or error occurred.
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Discovering if the incident is isolated or is part of a larger pattern.
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Consider applying computer assisted auditing techniques to look for similar patterns within the 
records (for example, all orders placed with a particular supplier).
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Estimating the financial effect.
This risk of failing to detect material misstatement due to fraud is greater than material misstatement 
due to error because fraudsters seek to conceal their activities. For example, by creating forged 
documents or by collusion with other parties.