Page 51 - AAA Integrated Workbook STUDENT S18-J19

Professional responsibilities and liability

Fraud and error, misstatements and

irregularity

Guidance regarding responsibility to consider fraud and error in an audit of financial
statements is provided in ISA 240 The Auditor's Responsibilities Relating to Fraud in
an Audit of Financial Statements.

2.1 Definitions

Irregularity: is the collective term for fraud, error, breaches of laws and
regulations, and deficiencies in the design or operating effectiveness of
controls. An irregularity may or may not result in a misstatement in the
financial statements.

Misstatement: A difference between the amount, classification,
presentation, or disclosure of a reported financial statement item and
the amount, classification, presentation, or disclosure that is required for
the item to be in accordance with the applicable financial reporting
framework. Misstatements can arise from error or fraud.

Fraud is 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.

Fraud can be split into two types:

 Fraudulent financial reporting – deliberately misstating the
financial statements to make the company's performance or
position look better/worse than it actually is.

 Misappropriation – the theft of a company’s assets such as cash
or inventory.

Error: An error can be defined as an unintentional misstatement in
financial statements, including the omission of amounts or disclosures.

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