Auditing standards board addresses fraud.

In May, the American Institute of CPAs auditing standards board issued an exposure draft of a proposed Statement on Auditing Standards, Consideration of Fraud in a Financial Statement Audit. The proposed standard's goals are to help auditors detect material misstatements caused by fraud and to reaffirm the auditor's responsibility with respect to material misstatements. It also is intended to help close the expectation gap relating to a CPA's responsibility to detect fraud.

A performance standard

The proposed SAS provides expanded operational guidance on the consideration of fraud in conducting a financial statement audit. Although the auditor's responsibility to detect material misstatement due to fraud did not change, the ASB concluded that a performance standard was needed to support the auditor in executing that responsibility.

The proposed SAS is likely to affect the audit process in several ways. The auditor would be expected to

* Specifically assess the risk of material misstatement of the financial statements due to fraud and consider that assessment in designing audit procedures.

* Consider fraud risk factors that relate to fraudulent financial reporting and misappropriation of assets in certain categories and other conditions identified that change or support a judgment regarding the assessment.

* Obtain management's view of the risk of material misstatement resulting from fraud.

* Document in the working papers evidence of the performance of the assessment, including how risk factors were considered.

* Document risk factors, individually or in combination, that the auditor believes significantly affect the risk of material misstatement, and the auditor's response to those factors.

* Document changes in the assessment that may occur during the audit and any further response that the auditor concluded was appropriate.

* Communicate to appropriate levels of management (or the audit committee or others outside the entity, depending on the circumstances) whenever there is evidence that fraud may exist.

The auditor's detection responsibility

The proposed changes in auditing standards clarify the auditor's existing responsibility--that is, to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether caused by error or fraud.

Comments invited

A free copy of the proposed SAS, product no. 800099JA, may be obtained by calling the AICPA order department at [phone]; fax no. [phone]. The exposure draft is also available on the Accountants Forum (use the search function to find it). Comments are due by August 15.

Atatomy of the Proposed SAS on Fraud

The proposed Statement on Auditing Standards, Consideration of Fraud in a Financial Statement Audit

* Describes fraud and its characteristics.

* Requires the auditor to specifically assess the risk of material misstatement due to fraud.

* Provides categories of fraud risk factors that should be considered in the auditor's assessment.

* Lists examples of fraud risk factors.

* Offers guidance on how the auditor should respond to the results of the risk assessment.

* Provides guidance on the evaluation of audit test results as they relate to the risk of material misstatement due to fraud.

* Describes related documentation requirements.

* Provides guidance on how to communicate about fraud with management, the audit committee and others.

Thomas Ray, CPA, director, and Jane Mancino, CPA, technical manager, AICPA audit and attest standards.