The frequency and variety of fraud being reported is increasing globally, impacting us as individuals as well as in the corporate arena. Our way of interacting with each other, conducting business, and maintaining organizational operations is changing – in part due to the pandemic, the accelerated adoption of technology, and remote and hybrid workforces. These changes create new opportunities for misappropriation of assets and fraudulent financial reporting.
Questions explored in this blog include:
- How do these environmental changes impact the financial statement audit?
- What work is being done in Canada and around the world to keep up with our evolving environment?
- What is your role, as auditor, under the current fraud standard and how might this evolve?
- What resources are available to help you in your audits in today's complex business landscape?
A spotlight on fraud
Concerns over fraud incidence are not new. However, significant advances in technology coupled with some of the largest corporate collapses, among other factors, have triggered heightened concern and an increased focus on fraud in recent years. A key element of the financial ecosystem is external audit. Auditors provide an independent assessment of an entity’s financial reporting. Recognizing the importance of the auditor’s role, standard setters, regulators, auditors, and other stakeholders in the financial ecosystem have refocused their attention on fraud and whether Canadian Auditing Standard (CAS) 240, The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, continues to be fit for purpose.
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The fraud standard: Time for enhancements?
Considering the current landscape, there are several recent and ongoing activities dedicated to exploring the auditor’s role related to fraud in the audit of financial statements and how this role may evolve. Notable projects, relevant to Canadian practitioners and stakeholders, include:
Canadian Public Accountability Board (CPAB)
- February 2020 – CPAB published results of their 2019 thematic review on fraud, which investigated how Canadian auditors of public companies are complying with CAS 240 and started exploring possible actions by relevant stakeholders to better prevent and detect corporate fraud.
International Auditing and Assurance Standards Board (IAASB)
- September 2020 – The IAASB published a discussion paper Fraud and Going Concern in an Audit of Financial Statements, which set out the issues and challenges related to the expectation gap (the difference between what users expect from the auditor and the financial statement audit, and the reality of what an audit is) and explores some possible actions that the IAASB could undertake to help narrow the expectation gap.
- December 2021 – The IAASB unanimously approved a project proposal to revise International Standard on Auditing (ISA) 240. The project will seek to clarify the auditor’s responsibilities and enhance the robustness of the required auditor’s procedures and reporting on fraud in an audit of financial statements.
Canadian Auditing and Assurance Standards Board (AASB)
- The AASB submitted its response letter to the IAASB’s Discussion Paper in February 2020. The board is now monitoring the IAASB’s project to revise ISA 240 and will be providing input on the changes to the standard. An advisory group and a reference group made up of Canadian stakeholders is being formed to provide input to the AASB on this project. Once the IAASB finalizes ISA 240, the AASB will adopt the standard, after considering any Canadian amendments, as CAS 240 (Revised).
CPA Canada and the AASB, in collaboration with the Association of Chartered Certified Accountants (ACCA) and Chartered Accountants Australia and New Zealand (CA ANZ)
- October 2021 – Jointly released a report Closing the expectation gap in audit – The way forward on fraud and going concern: A multi-stakeholder approach – which examines the auditor’s role in the areas of fraud and going concern and the related expectation gap and identifies recommendations to narrow this gap. With audit quality a concern in many countries, the report offers recommendations based on research with key stakeholders in the financial reporting ecosystem from around the world. These stakeholders include financial statement preparers, auditors, regulators, boards of directors and audit committees, and investors. The findings suggest that a holistic approach is needed, where all stakeholders will need to play a vital role in bringing about meaningful change. The report also explores possible actions which could help narrow the gap between what the public believes the auditor should do and what the auditor actually does in respect of fraud in an audit of financial statements. Two examples of recommendations included in the report are:
- strategic involvement of forensic specialists
Auditors are encouraged to consider the involvement of forensic specialists in risk assessment and to use their expertise in helping auditors design appropriate audit procedures to respond to identified fraud risks.
- focus on applying professional skepticism
While a majority of participants engaged in the consultations did not support revising the concept of professional skepticism, they did emphasize the importance of applying professional skepticism to support the execution of high quality audits. Some participants suggested increasing the involvement of more senior level staff throughout the engagement or placing more emphasis on effective supervision and review of junior staff.
Learn more about the above projects in our upcoming webinar.Register now
Auditing in today’s environment
While there is work underway to evolve the fraud standard, the reality is that revisions take time and auditors are required to comply with the current CAS 240 standard until such changes are in effect. What are some things to be thinking about in your audits this year?
The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one from error given that fraud is intentional and may involve sophisticated and carefully organized schemes designed to conceal the behaviour. The ongoing effects of the COVID-19 pandemic may result in an increased number of fraud risk factors affecting the potential for fraudulent financial reporting and misappropriation of assets. With changing operating conditions (including an entity’s controls), new pressures and opportunities to commit fraud may arise, and rationalization of acts of fraud may occur more frequently.
In another year where many audits are being performed remotely, the importance of applying professional skepticism cannot be overemphasized. Teaching junior staff to be skeptical can be especially challenging if you aren’t physically with them. If you or your audit team members could benefit from some tips and practical examples on how to exercise and demonstrate professional skepticism, listen to a podcast with Karen Higgins, audit and assurance partner at Deloitte Canada, titled Professional skepticism in a remote working environment. If you are planning upcoming audit engagements (or updating an existing plan), CPA Canada’s COVID-19 audit resources include helpful webinars and publications on topics such as the pandemic’s impact on internal controls and your audit, the changing nature of audit evidence, and assessing estimates in an uncertain climate.
What’s next? Tune in to our fraud webinar to hear more.
To further this conversation, we are hosting an upcoming webinar, Fraud in Audits of Financial Statements. The webinar will feature representatives from the AASB and CPAB. The panel will discuss:
- an overview of the current fraud standard
- current fraud-related projects
- AASB and CPAB perspectives on key requirements of CAS 240
- the IAASB direction in revising ISA 240
- tips for auditing in a pandemic environment
- CPAB's inspection themes
- resources available to help you in your audits
Although the perspectives being shared in this webinar will have a Canadian focus, they are informed by recent global activities undertaken by standard setters and regulators to explore changes needed to the auditing standards and how different stakeholders can contribute to such improvements.
Keep the conversation going
What questions or challenges do you face related to addressing your fraud responsibilities in audits of financial statements? What practices and experiences can be shared with others to support professional skepticism? We are interested in hearing your feedback on this topic and continuing the discussion. If you would like to share what you are seeing in practice or have ideas about fraud guidance that auditors may need, email me directly.
The views and opinions expressed in this article are those of the author and do not necessarily reflect that of CPA Canada.