Proposed Changes to Fraud Standard
The IAASB published an exposure draft in February 2024, which proposes a significant strengthening of ISA 240, The auditor’s responsibilities relating to fraud in an audit of financial statements (ED-240). The proposed changes should be considered thoroughly, and comments submitted to the IRBA by 10 May 2024, or to the IAASB by 5 June 2024, as the proposed revised standard will affect all auditors.
Work effort required, if fraud or suspected fraud is identified
The IAASB is proposing the following revisions in ED-240 to enhance clarity around the auditor’s response when fraud or suspected fraud is identified in the audit:
• A separate section in ED-240 that includes the requirements that are applicable when fraud or suspected fraud is identified in the audit
• New requirements, relocating existing requirements, elevating existing application material to requirements, and enhancing application material.
The most significant revision in ED-240 to the fraud or suspected fraud requirements is a new proposed requirement in paragraph 55 for the auditor to obtain an understanding of the fraud or suspected fraud. Although the need to obtain an understanding of the fraud or suspected fraud was implied in extant ISA 240, the IAASB is proposing to make that requirement explicit in paragraph 55 of ED-240.
The requirement in paragraph 55 describes how the auditor obtains the understanding of the fraud or suspected fraud, as well as the required elements of the auditor’s understanding. The application material paragraphs A150 and A151 clarify that the absence at the entity of a process to investigate or remediate the matter may, depending on the circumstances, be regarded by the auditor as an indicator of a significant deficiency in internal control.
The engagement partner is required to make determinations about the effect of the fraud or suspected fraud on the audit, in accordance with paragraph 56.
The rest of the fraud or suspected fraud requirements were not significantly revised from the corresponding requirements in extant ISA 240.
Transparency on key audit matters related to fraud
A key issue relating to transparency is that the auditor’s report may not be transparent enough regarding the auditor’s fraud-related responsibilities and procedures.
To enhance the transparency in the auditor’s report regarding the auditor’s responsibilities related to fraud in an audit of financial statements, the IAASB made the following consequential amendments to ISA 700 (Revised):
• Paragraph 40(a) of ISA 700 (Revised) was enhanced to include the auditor’s responsibilities to communicate to TCWG identified fraud, suspected fraud or other fraud-related matters that are, in the auditor’s judgment, relevant to the responsibilities of TCWG.• Paragraph 40(c) of ISA 700 (Revised) was enhanced to reflect the new auditor’s responsibilities, with respect to KAMs related to fraud.
The IAASB also made conforming amendments to the illustrative auditor’s reports in the appendix of ISA 700 (Revised) and other ISAs for the amendments to paragraphs 40(a) and 40(c) of ISA 700 (Revised).
Because the proposed requirements in ED-240 that deal with determining and communicating KAMs related to fraud in the auditor’s report are intended to be applied in addition to, or alongside the relevant requirements of the foundational standard, ISA 701, they effectively apply to audits of financial statements of listed entities. The proposals include expanding the applicability of ISA 701 to audits of financial statements of public interest entities (PIEs) and would, if approved, also expand the applicability of the requirements in ED-240 for KAMs related to fraud to audits of financial statements of PIEs.
Other proposed changes
The IAASB proposes further changes to achieve the following:
• Clarity and emphasis on the auditor’s responsibilities
• Ongoing communication throughout the audit with management and those charged with governance, about fraud-related matters
• Applying a fraud lens on risk identification and assessment
• Clarity on documentation requirements.
Refer to the Exposure Draft for more information in this regard:
https://www.irba.co.za/upload/IAASB-Exposure-Draft-Proposed-ISA-240-Revised-Fraud.pdf
In summary
Auditors need to understand the impact of the proposed changes to ISA 240 (Revised), and provide comments, if they do not support the proposals.
References
1. IAASB Exposure Draft, Feb 2024: Proposed ISA 240 (Revised), The auditor’s responsibilities relating to fraud in an audit of financial statements.
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