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AAS-4

Sunali (Learner) (1317 Points)

05 February 2009

As per AAS 4..

"Although Fraud is a broad legal concept, the auditor is concerned with fraudulent acts that cause a material misstatement in the financial statements".

Communication of Fraud under the same AAS states...

"if the auditor has, identified a fraud, whether or not it results in a material misstatement in the financial statement or

obtained evidence that indicates that fraud may exist (even if the potential effect on the financial statements would not be material),

the auditor should communicate these matters to the appropriate level of management on a timely basis and consider the need to report such matters to those charged with governance..

both the statements are contradictory...if anyone can clarify please..

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3 Replies

Pavan Jain S (Chartered Accountant) (1575 Points)
Replied 06 February 2009

As far as responsibility of the auditor to detect fraud, he can be held liable only if the fraudulent acts causes material misstatements in the FS. The entire concept of AS, AAS & GAAP revolves around the materiality of items on financial statements. So, it is specifically stressed that although the concept of fraud is large, auditor is concerned or responsible only for those frauds which cause or likely to cause material misstatements in the FS.

But, if it comes to auditors' knowledge that any fraud has taken place, even if not material, it is his responsibility to report to the appropriate level of management on timely basis. This is on the concept that even a small hole [not material] in the ship can make the ship sink.

Since the auditor is a watch dog, he is expected to report even non material instances of fraud to management for timely action. Since the matter do not have a material impact on the FS, he need not include the same in his report but the matter should form part of his working papers.

To conclude, the first para is w.r.t. responsibility of the auditor and the second is w.r.t his duties as a auditor

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Sunali (Learner) (1317 Points)
Replied 06 February 2009

Thanks sir..

payal gupta (ca final student) (482 Points)
Replied 15 February 2009

Originally posted by :Pavan Jain S
"	As far as responsibility of the auditor to detect fraud, he can be held liable only if the fraudulent acts causes material misstatements in the FS. The entire concept of AS, AAS & GAAP revolves around the materiality of items on financial statements. So, it is specifically stressed that although the concept of fraud is large, auditor is concerned or responsible only for those frauds which cause or likely to cause material misstatements in the FS. But, if it comes to auditors' knowledge that any fraud has taken place, even if not material, it is his responsibility to report to the appropriate level of management on timely basis. This is on the concept that even a small hole [not material] in the ship can make the ship sink. Since the auditor is a watch dog, he is expected to report even non material instances of fraud to management for timely action. Since the matter do not have a material impact on the FS, he need not include the same in his report but the matter should form part of his working papers. To conclude, the first para is w.r.t. responsibility of the auditor and the second is w.r.t his duties as a auditor	"