THE AUDITOR’S

RESPONSIBILITY
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Responsibility
CLIENT’S
MANAGEMENT AUDITOR
• Fair presentation in • Design audit to
accordance with provide reasonable
applicable assurance of
standards detecting material
misstatements in the
FS
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Material
Misstatements
▫ Error
▫ Fraud
▫ Noncompliance with Laws
and Regulations
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ERROR
-Unintentional Misstatements
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Motivation to commit +
perceived opportunity
to do so

FRAUD
-Intentional Misstatements
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Noncompliance
with Laws and
Regulations
-Omission/Commision
-Intentional/Non-intentional
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Types of Fraud
▫ Fraudulent Financial
Reporting
▫ Misappropriation of Assets
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Fraudulent Financial Reporting

-intentional misstatements/omissions
-Management Fraud
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Fraudulent Financial Reporting

-intentional misstatements/omissions
-Management Fraud

Misappropriation of Assets
-theft of assets
-Employee Fraud
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Misappropriation of Assets
-theft of assets
-Employee Fraud
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Fraudulent Financial Reporting

-intentional misstatements/omissions
-Management Fraud

Misappropriation of Assets
-theft of assets
-Employee Fraud
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Auditor’s
Responsibility:
Fraud/Error
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The auditor is not and

cannot be held responsible
for the prevention of fraud
and error.
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Planning Phase

2. Assess the risk

1. Make inquiries of
that fraud or error
Management
may be present
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Testing Phase

4. Consider whether
3. Perform necessary procedures
misstatements are
to determine whether material
because of fraud or
misstatements exist
error
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Completion Phase
6. If material 7. If unable to
5. Auditor should
error/fraud evaluate effect
obtain written exists: advice
of fraud, the
representation management to
auditor shall
revise FS
/acknowledgment qualify/disclaim
If immaterial:
from client express opinion his opinion.
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Auditor’s
Responsibility:
Noncompliance with
Laws and Regulations
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The auditor is not expected to

detect noncompliance with all
laws and regulations.
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Planning Phase

1. Obtain a general 2. Design 3. Design audit

understanding of the procedures to procedures to
legal and regulatory help identify obtain sufficient
framework applicable to instances of evidence about
the entity noncompliance compliance
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Testing Phase

4. When the auditor becomes 5. Document findings,

aware of possibility of discuss with
noncompliance, evaluate the management, and
possible effect on the FS. consider implications
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Completion Phase
7. If material
6. Auditor should 8. If unable to
noncompliance
obtain written evaluate effect of
exists: advice
noncompliance,
representation management to
the auditor shall
revise FS
/acknowledgment qualify/disclaim
If immaterial:
from client his opinion.
express opinion
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Fraud Risk Factors:

Misstatements from
Fraudulent Reporting
▫ Management’s Characteristics and
Influence over the control environment
▫ Industry Conditions
▫ Operating Characteristics and Financial
Stability
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Management’s Characteristics and

Influence over Control Environment
▫ Management fails to communicate an
appropriate attitude towards internal control and
financial reporting
▫ Aggressive earning’s projections
▫ High turnover of senior management
▫ Strained relations with independent auditors
▫ History of violations
▫ Governance is weak
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Industry Conditions

▫ Rapid change in the industry

▫ Industry in decline
▫ New accounting/regulatory requirements
▫ Saturation of competition
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Operating Characteristics and Financial

Stability
▫ Unusually rapid growth compared to other
entities
▫ Unrealistically aggressive sales incentive
programs
▫ Inability to generate cash flows while still
reporting earnings
▫ Threat of imminent bankruptcy / foreclosure /
hostile takover
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Fraud Risk Factors:

Misstatements from
Misappropriation of Assets
▫ Susceptibility of assets to
misappropriation
▫ Controls
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Thanks!
Any questions?
Patricia Deanne M. Pacana