ICAS response to the FRC consultation on its proposed revised ISA (UK) 240 on the auditor's responsibilities relating to fraud
ICAS response to FRC consultation on its proposed revised ISA (UK) 240 on the auditor's responsibilities relating to fraud.
ICAS has responded to the Financial Reporting Council’s (FRC) consultation on its proposed revised International Standard on Auditing (UK) 240 ‘The auditor's responsibilities relating to fraud.’ ICAS was supportive of the proposals and welcomed that the FRC’s approach recognises that it will require to wait to see the outcome from the forthcoming BEIS audit reform consultation before it can determine whether further more substantive changes are required to the standard. As recognised in the Brydon review, a holistic approach to tackling fraud will be required.
ICAS welcomed that ISA (UK) 240 has been appropriately revised to give increased clarity as to the auditor’s obligations relating to fraud in the audit of financial statements. Additionally, the ICAS view was that appropriate enhancements have been made to the requirements for the identification and assessment of material misstatement due to fraud, and the procedures to respond to those risks, to promote a consistent and robust approach to the auditor’s responsibilities in relation to fraud.
The extant ISA (UK) 240 establishes a rebuttable presumption that there are risks of fraud in revenue recognition. ICAS is not supportive of extending that rebuttable presumption to other account balances, transactions of disclosures. Rather, ICAS believes that such matters should be left to the professional judgement of the auditor which is crucial in this respect. Currently, in the midst of this Covid-19 pandemic, many businesses and individuals are under extreme financial pressure. Therefore, in the current environment it would appear a reasonable assumption that the financial statements of some businesses may be more susceptible to material irregularities in a range of areas as a consequence of error and/or fraud. It will therefore be key for audit teams to exercise professional and look at a broad range of risks relevant to the entity being audited.
ICAS is supportive of the FRC’s proposed changes in relation to the auditor’s procedures responsive to risks related to management override of controls. ICAS does not believe that at this time there are necessarily other audit procedures responsive to the risks of management override of controls or any other risks of material misstatement due to fraud, that should be required for all audits. However, given its very nature, collusion is difficult to detect when only using information from the entity being audited. Therefore, consideration might be given by the auditor to accessing information from outside the entity as is reflected in the appendices to the standard to get better insights into the performance of the audited entity. Such additional audit procedures might include performing key ratio analysis comparisons with competitors which may help to identify any areas where the entity may appear to be an outlier.
ICAS also believes that the FRC’s proposed requirements and application material are sufficiently scalable.