In connection with the audit of financial statements, an independent auditor could be responsible

Project Status

Project completed - February 2004

The objective of this project was to revise ISA 240, The Auditor's Responsibility to Consider Fraud and Error in an Audit of Financial Statements.

The project revised ISA 240 to align extant ISA 240 with the audit risk model and to adopt the basic principles and essential procedures contained in the US SAS 99, Consideration of Fraud in a Financial Statement Audit.

In March 2001, the IAPC issued ISA 240. In March 2001, the US ASB invited representatives of the IAPC to attend meetings of the US ASB's Fraud Task Force. The IAPC accepted the invitation with the view to obtaining an understanding of the development of a revised US SAS 82 so that ISA 240 could be revised to converge with the final revised US SAS 82, subject to any differences necessary to take account of the international environment.

In February 2002, the US ASB issued an exposure draft Consideration of Fraud in a Financial Statement Audit. The IAASB issued a response letter to this exposure draft.

In October 2002, the US ASB issued SAS 99.

• Distinguishes fraud from error and describes the two types of fraud that are relevant to the auditor, that is, misstatements resulting from misappropriation of assets and misstatements resulting from fraudulent financial reporting; describes the respective responsibilities of those charged with governance and the management of the entity for the prevention and detection of fraud, describes the inherent limitations of an audit in the context of fraud, and sets out the responsibilities of the auditor for detecting material misstatements due to fraud;
• Requires the auditor to maintain an attitude of professional skepticism recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditor's past experience with the entity about the honesty and integrity of management and those charged with governance;
• Requires members of the engagement team to discuss the susceptibility of the entity's financial statements to material misstatement due to fraud and requires the engagement partner to consider which matters are to be communicated to members of the engagement team not involved in the discussion;
• Requires the auditor to:
  
  • Perform procedures to obtain information that is used to identify the risks of material misstatement due to fraud;
  • Identify and assess the risks of material misstatement due to fraud at the financial statement level and the assertion level; and for those assessed risks that could result in a material misstatement due to fraud, to evaluate the design of the entity's related controls, including relevant control activities, and to determine whether they have been implemented;
  • Determine overall responses to address the risks of material misstatement due to fraud at the financial statement level and consider the assignment and supervision of personnel; consider the accounting policies used by the entity, and incorporate an element of unpredictability in the selection of the nature, timing and extent of the audit procedures to be performed;
  • Design and perform audit procedures to respond to the risk of management override of controls;
  • Determine responses to address the assessed risks of material misstatement due to fraud;
  • Consider whether an identified misstatement may be indicative of fraud;
  • Obtain written representations from management relating to fraud; and
  • Communicate with management and those charged with governance;
• Provides guidance on communications with regulatory and enforcement authorities;
• Provides guidance if, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters exceptional circumstances that bring into question the auditor's ability to continue performing the audit; and
• Establishes documentation requirements.

At the July 2003 IAASB meeting, the IAASB approved the proposed revised ISA for exposure. The exposure draft comment period ended on November 15, 2003.

The IAASB approved the proposed ISA 240 (Revised) in February 2004. The revised ISA is effective for audits of financial statements for periods beginning on or after December 15, 2004.

When companies register their securities with the U.S. Securities and Exchange Commission and file annual and other reports, they must disclose important financial information. In many cases, this information must be audited. This publication describes the role of the auditor in reviewing a company's financial books and records.

What Is an Auditor?

An auditor is an independent certified public accountant who examines the financial statements that a company's management has prepared. The federal securities laws require publicly held companies that file reports with the SEC to submit financial statements that are accurate, truthful, and complete and prepared according to a set of accounting standards called "Generally Accepted Accounting Principles" (or "GAAP"). Many of these financial statements - including those in the company's annual report and those provided to shareholders in connection with the solicitation of proxies for annual meetings - must be examined and reported on by an independent auditor.

What Do Independent Auditors Do?

A company's outside, independent auditor examines the company's financial statements and provides a written report that contains an opinion as to whether the financial statements are fairly stated and comply in all material respects with GAAP. In addition, some companies also use internal auditors to review the financial reporting processes and internal accounting controls to assure that the company's systems are appropriately designed and operating effectively.

Who Prepares a Company's Financial Statements?

A company's management has the responsibility for preparing the company's financial statements and related disclosures. The company's outside, independent auditor then subjects the financial statements and disclosures to an audit. During the audit, the outside auditor obtains an understanding of the company's internal controls and then applies "auditing procedures," which may include inspection of the company's books and records, observation, inquiries, and confirmations. The procedures the outside auditor uses must be sufficient to allow the auditor to obtain enough competent evidence to express an opinion on the fairness of the financial statements and whether they conform to GAAP in all material respects. If the auditor cannot reach that conclusion, then the auditor must either require the company to change the financial statements or decline to issue a standard audit report.

What's the Purpose of an Audit?

An audit provides the public with additional assurance — beyond managements' own assertions — that a company's financial statements can be relied upon. As the U.S. Supreme Court stated in the landmark case of U.S. v. Arthur Young: "The SEC requires the filing of audited financial statements in order to obviate the fear of loss from reliance on inaccurate information, thereby encouraging public investment in the Nation's industries." That has important implications for investors making investment decisions, for banks and financial institutions that may extend credit or make loans to the company, and for other businesses and members of the public who deal with the company.

How Can I Find Out Who Audits a Particular Company?

The best way to identify the auditor of a publicly traded company is to check the company's most recent filings using our EDGAR database of corporate filings. You'll find the identity of the company's auditor in its annual report on Form 10-K. Look for the "Accountant's Report" under Item 8 of the Form 10-K. Whenever a company hires a new auditor to certify its financial statements, it must announce that news on Form 8-K (under Item 4) within 5 business days. Be sure to check any Form 8-K filings submitted after the company's most recent annual report to find out whether the company subsequently hired a new auditor.

A variety of commercial resources exist that list publicly traded companies and their auditors. Some resources also list major auditing firms and the publicly traded companies they audit. You should be able to find these resources at your local public library or the nearest law or business school library. You can also find much of the information contained in these resource materials on the Internet.

What Else Should I Know?

In addition to serving as auditors, some accounting firms offer non-audit consulting services to their audit clients. You can check a company's annual proxy statement for information concerning the company's relationship to its independent auditor and the extent of other services the auditor might be performing for the company. For example, the company's proxy statement should disclose the fees for audit, information technology consulting, and all other services provided by the company's auditors during the last fiscal year.

For more information about investing wisely, please visit the Investor Information section of our website.

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