Fraud and Error
ISA 240: the Auditor’s duty to Consider Fraud and Error defines that whenever planning and performing audit procedures, computing and reporting outcomes thereby, the auditor must consider the risk of Material misstatements in the financial statements resultant from fraud or error.
Mis-statements in the financial statements can occur from fraud or error.
The word “error” refers to an unintentional mis-statement in financial statements, involving the omission of a quantity or a disclosure, like the following:
- A fault in assembly or processing data from which financial statements are organized.
- A wrong accounting estimation occurring from oversight or delusion of facts.
- A mistake in the function of accounting principles concerning to measurement, classification, recognition, presentation, or revelation.
The word “fraud” refers to an intentional act by one or more individuals amongst management, those charged with supremacy, employees, or third parties, including the use of deception to acquire an unjust or illegal benefit.
However fraud is a broad legal notion, the auditor is concerned with falsified acts which cause a material misstatement in the financial statements. Misstatement of the financial statements might not be the objective of several frauds. Auditors do not make lawful determinations of whether scam has actually happened. Fraud including one or more members of management or those charged with supremacy is termed to as management fraud;” fraud including only employees of the entity is termed to as “employee fraud.” In either situation, there might be collusion with third parties exterior the entity.
Two kinds of intentional misstatements are applicable to the auditor’s consideration of fraud – misstatements resultant from fraudulent financial reporting and misstatements resultant from misappropriation of possessions.