Recent corporate failures throughout the world have underscored the benefits of clarifying and enhancing the role of auditors in responding to fraud and suspected fraud as a means of enhancing public trust in financial reporting.

In response to stakeholders’ demands for enhancing the role of auditors relating to fraud, the International Auditing and Assurance Standards Board (IAASB) proposed a significant strengthening of its standard on auditors’ responsibilities relating to fraud. The proposed standard is open for consultation until June 5, 2024.

The proposed revisions define expectations related to fraud, delineate more robust procedures, and increase transparency about the auditors’ responsibilities and fraud-related procedures in the auditor’s report. 

Key Changes in the Proposed Revisions
The proposed revisions to International Standard on Auditing 240 (Revised), The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, include:

1. Clarifying auditor responsibilities relating to fraud in an audit. Changes are being proposed to set a clear and affirmative description of the auditor’s responsibilities relating to fraud in an audit of financial statements and to reduce the ambiguity between the inherent limitations of an audit and the auditor’s responsibilities by “decoupling” the two concepts.
2. Emphasizing professional skepticism to ensure auditors remain alert to possible fraud and exercise professional skepticism throughout an audit. Enhancements are being proposed to reinforce the importance of remaining alert throughout the audit engagement for information that is indicative of fraud and maintaining professional skepticism regardless of past experience or when efforts to conceal fraud could be manifested through pressure on the engagement team.
3. Strengthening identification and assessment of risks of material misstatement due to fraud. The risk identification and assessment section is enhanced by applying a fraud lens on what is already required by International Standard on Auditing 315 (Revised 2019), Identifying and Assessing the Risks of Material Misstatement. Changes restructure the risk assessment section by aligning it closer to the structure in ISA 315 (Revised 2019) to demonstrate the integrated relationship. The proposed changes also focus the auditor on identifying fraud risk factors which may lead to risks of material misstatement.
4. Clarifying response to fraud or suspected fraud identified during the audit. We’ve proposed including a separate section with new and enhance requirements if fraud and suspected fraud are identified, with the goal to develop a more robust work effort for the auditor in these instances.
5. Increasing ongoing communication with management and those charged with governance about fraud. The changes included in the exposure draft embody the ongoing nature of communications with management and those charged with governance about fraud related matters at appropriate time in all stages of the audit. The standard also highlights the importance of a robust two-way and open dialogue with active participation by all parties.
6. Increasing transparency about auditors’ responsibilities and fraud-related procedures in the auditor’s report. We’ve proposed that the auditor applies a fraud lens to the filtering mechanism used in ISA 701, Communicating Key Audit Matters in the Independent Auditor’s Report when determining Key Audit Matters with the goal to include more Key Audit Matters related to fraud in the auditor’s report.
7. Enhancing audit documentation requirements about fraud-related procedures to align more with the foundational standard on audit documentation (ISA 230) as well as documentation requirements in ISA 315 (Revised 2019). The auditor will document the matters discussed regarding the susceptibility of material misstatement due to fraud, the key elements of understanding obtained when making inquiries related to fraud or performing risk assessment procedures related to fraud and the results of the procedures performed.

We’ve also issued a video series to help stakeholders understand our proposed changes. You can watch the Understanding Proposed Changes to the Fraud Auditing Standard video series in YouTube.

After the IAASB has considered all feedback received on the proposed standard, we will start to deliberate on further possible revisions to the proposed standard at the September 2024 IAASB meeting with an aim of issuing a final standard in the first half of 2025. Please share your feedback before June 5, 2024. Read the proposed standard and provide feedback on the IAASB website.