PSA 240: Auditor’s Responsibilities Relating to Fraud
in FS Audits
PSA 250: Consideration of Laws and Regulations in
FS Audits
Philippine Institute of
Certified Public Accountants
Western Metro Manila Chapter
March 25, 2024
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PSA 240 & 250 Sub-topics:
• Overview of FS auditing and causes of
material misstatements
• Considering fraud in FS audits and fraud
risk factors
• Considering noncompliance and
indications of noncompliance
• Auditor’s responses
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Overview of
F/S Auditing
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Objective of F/S Audit
• Opinion expression as to fair
presentation of the F/S
In my opinion, the F/S are presented
fairly...
, CPA
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Objective of F/S Audit
• When the F/S are free from
material misstatements,
whether caused by fraud or
error (and noncompliance).
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Phases of F/S auditing
Assess FS risks of material
misstatement
What events
could occur that would
cause a material
misstatement in the
financial statements?
Design and perform audit
procedures that respond to
assessed risks and reduce to
acceptably low level
Did the events
identified occur and
result in a material
misstatement in the
financial statements?
Issue a suitably worded audit
report
What audit opinion,
based on the evidence
obtained, is appropriate
on the financial statements?
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Scope of PSA 250
•B
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Noncompliance, defined
• Non-compliance – Acts of omission or commission
intentional or unintentional, committed by the entity, or by
those charged with governance, by management or by
other individuals working for or under the direction of the
entity, which are contrary to the prevailing laws or
regulations.
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Effect of Laws & Regulations
• The provisions of some laws or regulations have a direct
effect on the financial statements in that they determine
the reported amounts and disclosures in an entity’s financial
statements.
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Direct-effect
Laws & Regulations
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Effect of Laws & Regulations
• Other laws or regulations are to be complied with by
management or set the provisions under which the entity is
allowed to conduct its business but do not have a direct
effect on an entity’s financial statements.
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Effect of Laws & Regulations
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Legal & Regulatory factors
Industry, regulatory factors
Other external factors
Nature of the entity
Measurement of performance
Understand the client’s
compliance function
Identify & assess ROMM due to
noncompliance
Respond to the assessed
noncompliance risks
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Auditor’s responsibility
•B
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Auditor’s responsibility
•B
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Auditor’s objectives
•B
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Auditor’s consideration of
compliance function
• The auditor shall obtain a general understanding of:
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Auditor’s responsibilities
•B
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Indications of Noncompliance
•B
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Documentation of risk of material
misstatements
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AUDIT PLANNING DOCUMENT
Name of Client:
Prepared by:
Date:
Closing Date:
Reviewed by:
Date:
1 Audit Scope, Acceptance/Continuance & Independence
1.1 Audit Scope Describe the scope
of the audit
1.2 Results from Client
Acceptance/Continuance
Procedures and Independence
Review Describe the results from the
client acceptance and continuance
procedures and the independence
review.
Example We have completed our client acceptance/continuance procedures and have not identified
any issues, which would indicate that we should not accept the audit/continue as the auditors to the
company. We are satisfied that there are no issues connected to the owners/managers or matters
related to the business which would indicate that the company would not be a suitable client. We
have also completed our independence review and are satisfied that there are no relationships either
personal or professional in nature, which would affect our objectivity and independence while
completing our duties as auditor.
2 Understanding the business
2.1 Understand the Nature of the Entity Identify key factors underlying the nature of the entity. Indicate how they influence management’s
actions and consider potential business and financial statement risks that may arise from them.
Inherent Risk Factors
Accounts & Assertions affected
Examples of factors to consider: Legal Form of the Business & OwnershipPrincipal Activities, Main Products and ServicesLocations,
facilities, plant & equipmentManufacturing process and sales/distribution methodsEmployees and unionization
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2.2 Understand Key Market Forces and Other Key Environmental Factors Identify key market forces and other key environmental factors. Indicate how they influence management’s
actions and consider potential business and financial statement risks that may arise from them.
Inherent Risk Factors
Accounts & Assertions affected
Examples of factors to consider: General Economic Trends/Regional and Local Economic ConditionsSignificant Trends in the Industry/Key Competitors and Competitive IssuesKey
Suppliers/Vendor RelationshipsKey Customers/Market PositionSources of Financing/Credit AvailabilityLegal and Regulatory Requirements Affecting the BusinessAccounting Practices and
Reporting Obligations Affecting the BusinessTaxation Matters Affecting the BusinessTechnological Advances Affecting the BusinessSocial, Economic and Political Factors Affecting the
Business
2.3 Understand How the Expectations of Key Stakeholders Influence Management’s Actions Identify key stakeholder expectations. Indicate how they influence management’s actions
and consider potential business and financial statement risks that may arise from them.
Inherent Risk Factors
Accounts & Assertions affected
Examples of factors to consider: Key client PersonnelEquity Based Arrangements/ Bonus or Profit Sharing Plans
2.4 Understand the Business Strategies and Objectives Identify key business strategies and objectives. Indicate how they influence management’s actions and consider potential business
and financial statement risks that may arise from them.
Inherent Risk Factors
Accounts & Assertions affected
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Effect on auditor’s report
• If the auditor concludes that an identified or suspected noncompliance has a material effect on the financial statements,
and has not been adequately reflected in the financial
statements, the auditor shall express a qualified opinion or
an adverse opinion on the financial statements.
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Effect on auditor’s report
• If the auditor is precluded by management from obtaining
sufficient appropriate audit evidence to evaluate whether
non-compliance that may be material to the financial
statements has, or is likely to have, occurred, the auditor
shall express a qualified opinion or disclaim an opinion on
the financial statements on the basis of a limitation on the
scope of the audit
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Noncompliance
Evaluate the possible effect of the noncompliance on the F/S
Potential financial consequences
Whether it requires disclosure
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Example: RA 7641
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Fraud, defined
• Fraud – An intentional act by one or more individuals
among management, those charged with governance,
employees, or third parties, involving the use of
deception to obtain an unjust or illegal advantage.
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Fraud categories
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What fraudulent reporting
scheme is this?
Cookie jar
accounting reserves - occurs
when an entity sets up earnings
reserves during profitable periods
and draws down from these
r e s e r ve s d u r i n g l owe r- p r o f i t
periods.
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Illustration:
Year 1
Year 2
Revenue
Costs & expenses
Profit
Target profit
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Misappropriation of Assets
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Illustration:
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Fraud considerations
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Fraud considerations
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Audit Risk
Risk Components
Nature
Source
Inherent and
Control Risks
The financial statements may
contain a material misstatement.
Entity objectives/operations and
management’s design/implementation
of internal control.
Detection Risk
The auditor may fail to detect a
Nature and extent of the procedures
material misstatement in the financial performed by the auditor.
statements.
Fraud risks
Part of inherent or possible control
risk
Financial targets
Opportunities to commit fraud
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Discussion among the audit team
•B
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How & where in the F/S
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How & where in the F/S
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Fraud Risk Factors
• The auditor shall evaluate whether the information obtained
from the risk assessment procedures and related activities
performed indicates that one or more fraud risk factors are
present.
• While fraud risk factors may not necessarily indicate the
existence of fraud, they have often been present in
circumstances where frauds have occurred and therefore may
indicate risks of material misstatement due to fraud.
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Fraud Risk Factors
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Fraud risk factors – Events or conditions that indicate an
incentive or pressure to commit fraud or provide an
opportunity to commit fraud.
(PSA 240)
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Illustration:
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3 Observations from Preliminary Analytical Review
Populate the table below with the client’s draft accounts, describe the causes of any significant variances and indicate which matters require
an audit response. Insert additional account balances when appropriate.
Account balance
Current year
Prior year
Net change
Net change
PhP
PhP
PhP
%
Fixed assets
Inventory
Trade receivables
Prepayments
Cash and cash equivalents
Trade payables
Accruals
Long term debt
Share capital
Retained earnings
Sales
Cost of sales
Gross profit
Wages and salaries
Administrative costs
Finance costs
Profit/loss for year
For each significant movement provide detail of the causes of the movement. Indicate any matters requiring follow up during the audit.
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From PSA 240
•B
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Assessment of Fraud Risks
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Overall response
•B
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Overall response
•B
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Assertion-level response
Class of
Transaction,
Account
Balance, or
Disclosure
Risk Description
Relevant
Assertion
Affected
Inheren
t Risk
Control
Risk
Assess
Risk of
Material
Misstatement
Is This a
Significant
Risk?
Further Audit
Procedures to Be
PerformedAudit Response
incl. Special Consideration
for significant risks
Reference to
Audit Program
Steps
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Information taken from the income statement and
cash flow statement of ABC Co.:
2019
“Where is the
cash flow?”
(in million $)
2018
2020
Net income
1,452
1,985
2,424
Net cash from
operating activities
472
(1,165)
(1,630)
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• Good or poor
cash flows?
• Is the company
able to buy new
fixed assets?
• Is the company
able to rise
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•B
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Sources and Authoritative Literature:
 PSA 240, “The Auditor’s Responsibilities relating to Fraud in an Audit of the
Financial Statements”
 Report of the National Commission on Fraudulent Financial Reporting
 Association of Certified Fraud Examiners, 2020 Report to the Nations.
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