Document ID: chunk:federal_register_of_legislation:F2023C01124:reg:17:p3
Version: federal_register_of_legislation:F2023C01124
Segment Type: reg
Provision Reference: reg 17 (pt 3/41)
Character Range: 17549–20619

fraudulent financial reporting and misstatements resulting from misappropriation of assets.  Although the auditor may suspect or, in rare cases, identify the occurrence of fraud, the auditor does not make legal determinations of whether fraud has actually occurred.  (Ref: Para. A1‑A7)

Responsibility for the Prevention and Detection of Fraud

4.                   The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.  It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment.  This involves a commitment to creating a culture of honesty and ethical behaviour which can be reinforced by an active oversight by those charged with governance.  Oversight by those charged with governance includes considering the potential for override of controls or other inappropriate influence over the financial reporting process, such as efforts by management to manage earnings in order to influence the perceptions of analysts as to the entity's performance and profitability.

Responsibilities of the Auditor

5.                   An auditor conducting an audit in accordance with Australian Auditing Standards is responsible for obtaining reasonable assurance that the financial report taken as a whole is free from material misstatement, whether caused by fraud or error.  Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial report may not be detected, even though the audit is properly planned and performed in accordance with Australian Auditing Standards.[3]

6.                   As described in ASA 200,[4] the potential effects of inherent limitations are particularly significant in the case of misstatement resulting from fraud.  The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error.  This is because fraud may involve sophisticated and carefully organised schemes designed to conceal it, such as forgery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor.  Such attempts at concealment may be even more difficult to detect when accompanied by collusion.  Collusion may cause the auditor to believe that audit evidence is persuasive when it is, in fact, false.  The auditor's ability to detect a fraud depends on factors such as the skilfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved.  While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for the auditor to determine whether misstatements in