Auditing and Assurance Standard 4

In AAS 4 (Auditor’s responsibility to consider fraud and errors), we read the responsibility of an auditor when there is a fraud or error in the financial statements. It is the duty of auditor to deduct and stop the fraud and errors.  He is not the employee of company but he is the trustee of all interested parities of company. His aim is to protect company’s goodwill and assets. Save the money of interested parties. When auditor sees that there are manipulation , falsification and alteration of accounting records for cheating financial statements users, auditor should prevent it by informing legal authorities.

If he audits with full of care and his audit knowledge but still accounts are not free from material misstatements, at that time, auditor is not responsible for this. Auditor provides the opinion on financial statements upto the reasonable level of assurance. He does not give the guarantee that there is a not material misstatement due to fraud or errors.

For doing his responsibility with better way, he will take some of following steps.

1. Discussion with Management Officers

Auditor will discuss with management when he finds any intentional fraud in accounting records. All are not bad. Auditor should become positive. He has to faith management officers. Only discussion will help to find the bad fish in the company. Discussion will be helpful for finding real reason of misstatements.

2. Inquiries of Management

Auditor should become rational. He should not faith by closing his eyes. He should do some inquiries for knowing who did fraud. Which of all employees had done this. By inquiries, he should know whether company’s mgt. knows the accounting fraud or not.

3. Communication

When auditor finds misstatements due to fraud or errors, he should inform following

a)      Management of company

b)      Person with charged

c)      Regulatory authorities

Auditor should inform regulatory authorities like RBI, CBI or SEBI only when it is compulsory as per law. For example, if any non-banking financial company has done fraud through misstatement of accounting records, its information must be sent to RBI by auditor. 

Related : AAS 3