Ongoing communications with management and those charged with governance
What’s new?
There is a new explicit requirement for robust two-way communication between management or those charged with governance and the auditor at appropriate times throughout the audit about fraud-related matters, including:
- Risk assessment –
- asking management about its communications with those charged with governance regarding their processes for identifying and responding to the risks of fraud in the entity; and
- asking those charged with governance about their:
- views about whether the financial statements may be materially misstated due to fraud, and
- awareness of deficiencies in the system of internal control related to the prevention and detection of fraud and any remediation efforts to address those deficiencies.
- Identification of fraud or suspected fraud – If the auditor identifies fraud or suspects fraud, they learn more about the matter from a level of management that is at least one level above those involved and, when appropriate, those charged with governance.
- Reporting – The auditor’s report reflects the additional communications with those charged with governance about identified fraud or suspected fraud and other matters related to fraud that are, in the auditor’s judgment, relevant to the responsibilities of those charged with governance.
See the proposed auditor’s report here.
As the primary responsibility for the prevention and detection of fraud rests with management and those charged with governance, it is important that management and those charged with governance have a thorough understanding of the fraud risks at the entity or of any identified fraud or suspected fraud. This will also help you respond to the auditor’s inquiries.
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Improving transparency in the auditor’s report
What’s new?
Auditor’s reports of listed entities will have greater transparency by requiring the auditor to include key audit matters (KAM) relating to fraud. KAMs are, in the auditor’s professional judgment, most significant when auditing financial statements of the current period. KAMs are selected from matters communicated with those charged with governance. KAMs related to fraud may include, for example:
- identified and assessed risks of material misstatement due to fraud;
- identification of fraud or suspected fraud; and
- identification of significant deficiencies in internal control that are relevant to the prevention and detection of fraud.
In the audit of a complete set of general-purpose financial statements for a listed entity, it may be rare that the auditor would not determine at least one KAM related to fraud. However, in certain limited circumstances, the auditor may determine that there are no KAMs related to fraud.
One of the objectives of the Auditing and Assurance Standards Board’s (AASB) ED-CAS 240 outreach is to obtain feedback on the understandability and usefulness of KAMs related to fraud. Tell us what you think of the changes in the auditor’s report!
See the proposed auditor’s report here.
The auditor’s report accompanies a complete set of general-purpose financial statements and users expect greater transparency on fraud-related matters in the auditor’s report. Management and those charged with governance may decide to include new or enhanced disclosures, which will be communicated in the auditor’s report. Such new or enhanced disclosures may be included to provide more robust information about:
- identified fraud or suspected fraud; or
- identified deficiencies in internal control that are relevant to the prevention and detection of fraud.
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