164 General Principles and Responsibilities
It is important that management, with the oversight of those charged with gov-
ernance, places a strong emphasis on fraud prevention, which may reduce op-
portunities for fraud to take place, and fraud deterrence, which could persuade
individuals not to commit fraud because of the likelihood of detection and pun-
ishment. This involves a commitment to creating a culture of honesty and ethi-
cal behavior, which can be reinforced by active oversight by those charged with
governance. Oversight by those charged with governance includes considering
the potential for override of controls or other inappropriate inuence over the
nancial reporting process, such as efforts by management to manage earnings
in order to inuence the perceptions of nancial statement users regarding the
entity's performance and protability.
Responsibilities of the Auditor
.05 An auditor conducting an audit in accordance with GAAS is responsi-
ble for obtaining reasonable assurance that the nancial statements as a whole
are free from material misstatement, whether caused by fraud or error. Due
to the inherent limitations of an audit, an unavoidable risk exists that some
material misstatements of the nancial statements may not be detected, even
though the audit is properly planned and performed in accordance with GAAS.
1
.06 As described in section 200, Overall Objectives of the Independent Au-
ditor and the Conduct of an Audit in Accordance With Generally Accepted Au-
diting Standards, the potential effects of inherent limitations are particularly
signicant in the case of misstatement resulting from fraud.
2
Theriskofnot
detecting a material misstatement resulting from fraud is higher than the risk
of not detecting one resulting from error. This is because fraud may involve
sophisticated and carefully organized schemes designed to conceal it, such as
forgery, deliberate failure to record transactions, or intentional misrepresenta-
tions being made to the auditor. Such attempts at concealment may be even
more difcult to detect when accompanied by collusion. Collusion may cause
the auditor to believe that audit evidence is persuasive when it is, in fact, false.
The auditor's ability to detect a fraud depends on factors such as the skillful-
ness of the perpetrator, the frequency and extent of manipulation, the degree
of collusion involved, the relative size of individual amounts manipulated, and
the seniority of those individuals involved. Although the auditor may be able
to identify potential opportunities for fraud to be perpetrated, it is difcult for
the auditor to determine whether misstatements in judgment areas, such as
accounting estimates, are caused by fraud or error.
.07 Furthermore, the risk of the auditor not detecting a material misstate-
ment resulting from management fraud is greater than for employee fraud be-
cause management is frequently in a position to directly or indirectly manip-
ulate accounting records, present fraudulent nancial information, or override
control procedures designed to prevent similar frauds by other employees.
.08 When obtaining reasonable assurance, the auditor is responsible for
maintaining professional skepticism throughout the audit, considering the po-
tential for management override of controls, and recognizing the fact that au-
dit procedures that are effective for detecting error may not be effective in
detecting fraud. The requirements in this section are designed to assist the
auditor in identifying and assessing the risks of material misstatement due to
fraud and in designing procedures to detect such misstatement.
1
Paragraphs .A55–.A56 of section 200, Overall Objectives of the Independent Auditor and the
Conduct of an Audit in Accordance With Generally Accepted Auditing Standards.
2
Paragraph .A55 of section 200.
AU-C §240.05 ©2021, AICPA