Financial reporting principles resulting from the

financial reporting principles resulting from the misapplication of accounting standards
will result in a disagreement and thus a potential qualification of the audit opinion.
Reporting to those charged with governance
Instances of fraudulent financial reporting should be communicated to those charged
with governance on a timely basis. The relevant audit procedures necessary to
complete the audit should also be discussed.
Other reporting responsibilities
ISA 240 (Redrafted) indicates that where fraud has occurred, the auditor should
consider other reporting responsibilities, such as communications with regulatory and
enforcement authorities. In many jurisdictions, it would also be appropriate to
communicate with shareholders, for example at a general meeting of members.
Conclusion
Current global economic circumstances mean that auditors face increased audit risk.
Preparers of financial statements have the motive to make the published accounts
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AAA Technical Articles
appear as good as possible, and the means to do this is earnings management or
fraudulent financial reporting. Auditors therefore need to conduct risk assessment and
audit procedures carefully, in order to fully identify indicators of manipulation, and to
gather sufficient evidence to decide whether any manipulation is the result of bending or
breaking financial reporting rules, for which the ultimate consequence may be a
qualified audit opinion. Auditors, as well as shareholders, may need to approach all
companies’ financial statements with an increased degree of scepticism in the current
climate.
Written by a member of the P7 examining team
References
1. Recession-Related Risks, a Top Concern for Audit Committees, KPMG Audit Committee
Institute Survey, 2008.
2. Namasiku L, Earnings Management, Student Accountant , April 2004.
16) Forensic auditing
This article explores some of the issues relevant to forensic investigations.
‘Forensic auditing’ covers a broad spectrum of activities, with terminology not strictly
defined in regulatory guidance. Generally, the term ‘forensic accounting’ is used to
describe the wide range of investigative work which accountants in practice could be
asked to perform. The work would normally involve an investigation into the financial
affairs of an entity and is often associated with investigations into alleged fraudulent
activity. Forensic accounting refers to the whole process of investigating a financial
matter, including potentially acting as an expert witness if the fraud comes to trial.
Although this article focuses on investigations into alleged frauds, it is important to be
aware that forensic accountants could be asked to look into non-fraud situations, such
as the settling of monetary disputes in relation to a business closure or matrimonial
disputes under insurance claims.