This paper discusses the auditor’s responsibility for fraud and error. It studies the link between the objectives of external audit to this responsibility. It draws on relevant auditing standards that provide guidance on the responsibility of the auditor for fraud and error in the financial statements. It also discusses the responsibilities of the business entities’ board of directors and management. Lastly, it provides some discussions on the higher – profiled fraud cases in the past and the effect on the auditing profession of these high – profiled cases.
The Glossary to the International Standards on Auditing or ISA (p. 19, IFAC, 2010) officially defines fraud as “an intentional act”, committed by a certain individual or certain individuals by using deception “to obtain an unjust or illegal advantage” that inevitably leads to the misstatement of the financial statements. Error, on the other hand, is defined as an “unintentional misstatement in financial statements” which may include omitting a certain amount or a certain disclosure (p.
18, IFAC, 2010). Both fraud and error may lead to financial statements misstatements. Both of them may lead to restatements misstated financial statements. However, what sets the two apart is whether the financial statements misstatement is deliberate or not, with fraud considered more serious (and illegal) than error.Financial statements fraud is done due to a variety of reasons. Some of the reasons may include trying to obtain new credit or more investments. “creating favorable stock value”. trying to conceal an inability to improve the performance of the company. increasing management or the board compensation by showing higher earnings. “obtaining a promotion…within the company” and “hiding improper business transactions” (p.
58, Rezaee and Riley, 2010). .
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