The Auditor’s Responsibility and fraud.
Fraud seems to be a subject covered frequently over the past few months. Whether it’s Donald Trump claiming voting irregularities in the US Presidential Election or the incorrect application of schemes associated with the Chancellor’s proposal to support the economy during this unprecedented time. Fraud appears to be something we cannot escape.
After an influx of acronyms introduced by Chancellor Rishi Sunak since the start of the lockdown period (Coronavirus Job Retention Scheme (CJRS), Job Retention Bonus (JRB), Self-Employment Income Support Scheme (SEISS) to name a few), has made way for many more opportunities for fraudsters to obtain public money have arisen.
Suggestions from the National Audit Office suggest that the taxpayer may foot a bill of between £16bn & £26bn on the bounce back loans (BBLs) of fraud and bad debt alone, however, the true fraud figure would not be clear for many more months. Back in September, the Public Accounts Committee was told by HMRC that fraudulent or paid in error CJRS payments have amassed to a whopping £3.5bn.
ISA 240 – The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
Ever since 2004 when this ISA was adopted in the UK, auditors responsibility has been to specifically assess the risks of material misstatement due to fraud in the financial statements and to design and input procedures to detect such misstatements. The auditor is also responsible for gaining reasonable assurance that financial statements are free from material misstatement, whether it be from error or fraud.
The Financial Reporting Council (FRC), in October launched a consultation on a proposed revision to its UK standard ISA (UK) 240. Regarding the notes that accompanied the exposure draft, the FRC explained that since the adoption 16 years ago, the ISA has only experienced minor amendments, and hasn’t received a substantial revision over the period inbetween.
It also considers concerns that have been raised stating that auditors have not been doing enough to ensure detection of material fraud, Sir Donald Brydon also raised this concern in his review of the quality and effectiveness of audit. The demise of some high-profile businesses happened shortly after audit reports had been signed off has brought this situation to the forefront.
With the International Auditing and Assurance Standards Board (IAASB) conducting an independent review of ISA 240, the FRC have raised concerns that it could be a number of years before that is finalised, and therefore has expressed the importance to act now in order to address the immediate concerns identified in the UK regarding the auditor’s responsibilities in respect of fraud.
Consultation Paper and Impact Assessment
Both the Consultation Paper and Impact Assessment accompanying the exposure draft go into great detail, explaining the proposed changes. A revision to the ISA (UK), now allows the FRC to include any changes being introduced by ISA (UK) 315 (Revised July 2020). Both ISA (UK) 315 and the suggested revision to ISA (UK) 240 will have an effective date of accounting periods beginning on or after 15th December 2021.
The mentioned consultation is open until 29th December 2021.
ICAEW Know-How guide
Whilst the proposed changes won’t affect audits until a couple of years’ time, the issues we see arising due to the current pandemic will be presenting themselves in this current round of the audit cycle to auditors.
The ICAEW’s Audit and Assurance Faculty have also issued a Know-How guide ‘How to report on irregularities, including fraud, in the auditor’s report – a guide for auditors’.
The guide explains how requirements have changed with ISA (UK) 700 (Revised January 2020) so for audit periods that commenced on or after 15 December 2019, auditors (where ISAs (UK) apply) are required to explain in the auditor’s report to what extent the audit was considered capable of detecting irregularities, including fraud.
CaseWare Audit manuals will be updated to include these updates.
Although an old saying, an auditor “is a watchdog, not a bloodhound” is still in the case law books (Kingston Cotton Mills Company – 1986), it is apparent that addressing matters relating to fraud is only going in one direction.