AICPA board to continue discussing auditing standard-setting project on fraud

The AICPA's Auditing Standards Board (ASB) will continue to discuss a draft proposal to revise its standard on fraud during a meeting on Aug. 22, 2024.

According to a work plan discussed in May, the board is aiming to issue an exposure draft late in the fourth quarter-Statement on Auditing Standards (SAS), The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, which would supersede SAS No. 122, Statements on Auditing Standards: Clarification and Recodification, as Amended, Section 240, Consideration of Fraud in a Financial Statement Audit.

It is unclear whether an exposure draft will be issued by the end of the year as not all outstanding issues will be discussed during the upcoming meeting. Several issues, such as effective date and audit procedures responsive to risks related to management override of controls, will be discussed during a meeting in November.

The ASB's goal is to enhance the auditor's consideration of fraud in a financial statement audit based on research carried out in 2022-2023 related to fraud. Moreover, the board is considering convergence with international standards. The International Auditing and Assurance Standards Board (IAASB) issued a proposal on fraud in February.

The ASB is also monitoring the PCAOB's project on fraud which is on its mid-term agenda.

During the meeting on Thursday, a task force that drafted the proposal will ask ASB members of their views about several issues:

• title, introduction, objectives, and definitions including related application material;
• professional skepticism, engagement resources, engagement performance, ongoing nature of communications with management and those charged with governance;
• risk assessment procedures and related activities, obtaining and understanding of the entity and its environment, the applicable financial reporting framework and the entity's system of internal control, identifying and assessing the risks of material misstatement due to fraud; responses to the assessed risks of material misstatements due to fraud;
• evaluation of accumulated results and analytical procedures performed near the end of the audit in forming an overall conclusion; and
• communications with management and whose charged with governance; other matters related to fraud; documentation

In terms of the new standard's title, a discussion paper says that the ASB in October last year directed the task force to change AU-C Section 240 from Consideration of Fraud in a Financial Statement Audit to align with the IAASB's title for the standard-The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements- because the ASB believes the title better reflects the intent of AU-C section 240.

The front section of the proposed draft reorganizes the existing standard and places the auditor's responsibilities before the inherent limitations of an audit to separate it from the discussion about inherent limitations.

"The descriptions of the inherent limitations of the audit and the auditor's responsibilities relating to fraud in an audit are consistent with how those concepts are described in extant AU-C section 240," the task force notes in the discussion paper. "As noted in the explanatory memorandum of IAASB ED-240, the IAASB was not seeking to expand the role and responsibilities of the auditor relating to fraud in an audit of financial statements."

During previous meetings, the ASB made decisions on several substantial issues, including the retention of the definition of fraud and fraud risk factors in AU-C Section 240.

Fraud is "an intentional at by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in financial statements that are the subject of an audit."

Fraud risk factors are "events or conditions that indicate an incentive or pressure to perpetrate fraud, provide an opportunity commit fraud, or indicate attitudes or rationalizations to justify a fraudulent action."

In the meantime, the IAASB will discuss its fraud project in September and December. The global standard-setter is aiming to finalize the standard in March 2025.

The IAASB's proposed revisions include:

1. Clarified auditor responsibilities relating to fraud in an audit.

2. Emphasized professional skepticism to ensure auditors remain alert to possible fraud and exercise professional skepticism throughout an audit.

3. Strengthened identification and assessment of risks of material misstatement due to fraud.

4. Clarified response to fraud or suspected fraud identified during the audit.

5. Increased ongoing communication with management and those charged with governance about fraud.

6. Increased transparency about auditors' responsibilities and fraud-related procedures in the auditor's report.

7. Enhanced audit documentation requirements about fraud-related procedures.

At the Aug. 22 meeting, the ASB will also discuss its project on audit confirmation.

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