International and US standards: error and fraud
Janet L. Colbert
Western Kentucky University, Bowling Green, Kentucky, USA
Introduction
Both the International Federation of
Accountants (IFAC) and the American
Institute of Certified Public Accountants
(AICPA) provide guidance to external
auditors as they search for misstatements in
the financial statements. Misstatements may
be the result of error or fraudulent activities.
The IFAC's guidance for both error and
fraud is found in one pronouncement,
International Statements on Auditing (ISA)
11, entitled ``Fraud and Error'' (1982). In
contrast to the IFAC , the AICPA devotes two
Standards to the topics. Statement on
Auditing Standards (SAS) 47, ``Audit Risk
and Materiality in Conducting an Audit''
(1983), provides recommendations to the
auditor in the search for misstatements
caused by errors, while SAS 82,
``Consideration of Fraud in a Financial
Statement Audit'' (1997), specifies procedures
to be performed when considering the
possibility of misstatements caused by fraud.
Many similarities between ISA 11 and
SASs 47/82 exist; differences are also present.
Besides being familiar with requirements of
the Standards, auditors, especially those with
clients interested in cross-border securities
markets, should comprehend these
similarities and differences.
ISA 11
ISA 11 provides the auditor with an
explanation of the differences between errors
and fraud. Also, recommendations regarding
how the auditor should approach risk
assessment are given. Finally, audit
procedures to be used to detect error or fraud
and the auditor's reporting responsibilities
are covered in the Standard.
Differentiating errors and fraud
ISA 11 explains that the characteristic which
differentiates error from fraud is intent.
Errors result from unintentional mistakes
while fraud occurs due to intentional actions.
Because perpetrators typically attempt to
conceal fraud, the auditor is more likely to
detect error than fraud.
Risk assessment
ISA 11 requires the auditor to assess the risk
that error or fraud may have occurred and
resulted in material misstatements to the
financial statements. The assessment should
be made during the planning stage of the
engagement. To aid in assessing the risk, the
Statements furnish many examples of factors
which may indicate the presence of error or
fraud. The factors fall into four categories.
They are: integrity and competence of
management, unusual pressures, unusual
transactions, and sufficient, competent
evidence. Table I shows factors in each of
these categories.
Detection procedures
Using the results of the risk assessment
process, the auditor designs procedures to
detect misstatements caused by either error
or fraud. The procedures should provide the
auditor with reasonable assurance that
misstatements which could be material to the
financial statements are located. The results
of the audit procedures may suggest that
misstatements caused by fraud or material
error are present in the financial statements.
Depending on the type of error or fraud, the
likelihood of occurrence, and the materiality
of the error or fraud, the auditor may choose
to modify later substantive tests. The nature,
timing, and/or extent of the tests may be
adjusted in response to the increased risk of
material misstatements from error or fraud.
Reporting
ISA 11 makes recommendations regarding
the auditor's reporting of misstatements due
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[ 97 ]
Managerial Auditing Journal
15/3 [
2000
] 97±107
# MCB University Press
[
ISSN 0268-6902
]
Keywords
Accounting standards,
External audit, Fraud
Abstract
Both the international and US
auditing Standards provide gui-
dance to the auditor in searching
for material misstatements
caused by errors and fraud. Audi-
tors, especially those with clients
interested in cross-border securi-
ties markets, should comprehend
the similarities and differences in
the requirements found in the
Standards in these significant
audit areas. A comparison of the
international Standard for error
and fraud to the two US Standards
for these topics discloses numer-
ous similarities and a few differ-
ences. The findings are reassuring
to auditors serving clients with
cross-border interests. Whether
the auditor is utilizing the interna-
tional or the US guidance, com-
parable audit work in searching for
misstatements arising from errors
and fraud is being performed.