Acca aa s21 Notes

pre-issuance ('hot') review
- i.e. it is carried out 
before
the auditor’s 
report is signed. 
Any reviews carried out after the auditor’s report is signed are known as 
post-issuance ('cold') 
reviews. 
They will not affect the audit for the year being reviewed, but they will help maintain or 
improve quality standards in the future.
An audit firm may choose to carry out reviews ('hot' or 'cold') where an EQCR is not required.
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Chapter 25 
FRAUD, LAWS AND REGULATIONS
1. Definitions
Fraud
is an intentional act by one or more individuals that uses deception to obtain an unjust or 
illegal advantage. 
There are two types of fraud that result in misstatement of the financial statements:
๏
Fraudulent financial reporting. For example, overstating profits to attract investors and lenders.
๏
Misappropriation of assets. For example, the theft of cash, inventory or non-current assets.
Error
is an unintentional mistake in financial statements including the omission of an amount or 
disclosure.
Teeming and lading
is a fraud on trade receivables. The theft of money from customer A is concealed 
by allocating later receipts from customer B to customer A’s account. (‘Robbing Peter to pay Paul’)
2. Fraud in an Audit of Financial Statements
It is management’s responsibility to prevent and detect fraud – not the auditor’s. Auditors are not 
expected to find every fraud, but they are expected (with reasonable assurance) to find material 
misstatements, whether caused by fraud or error. 
At the planning stage, the susceptibility of material misstatement due to fraud should be discussed 
with the engagement team members. Examples of fraud risk factors (i.e. that increase the risk of fraud) 
include:
๏
Deficiencies in internal control (e.g. lack of segregation of duties, inadequate monitoring)
๏
Significant accounting estimates that are difficult to corroborate
๏
Easy-to-steal assets (e.g. cash and small but high-value inventory items)
๏
Known history of breaches of laws of regulations
๏
Pressures on management to meet financial targets.
A fraud must be communicated to those charged with governance (TCWG) if it results in material 
misstatement or if management is implicated. Other frauds should be communicated to a suitable 
level of management. It is important, even for what appears to be a small fraud, to investigate for
how long it has been going on, how much is involved and who is involved.