36 .Responsibility for the detection of fraud and error
The responsibility rests with management through the implementation and continued operation of an adequate system of internal control which reduces the possibility of fraud and error.
Inherent limitations of and audit
While the existence of an effective system of internal control reduces the probability of misstatements of financial information resulting from fraud and error, there will always be some risk of internal controls failing to operate as designed.
Any system of internal controls may be ineffective against fraud involving collusion among employees or fraud committed by management.
Conditions which increase risk of fraud and error (indicators)
The following conditions may indicate the existence of fraud and error:
(a) questions with respect to the integrity or competence of management.
(b) unusual pressures within the entity
(c) unusual transactions
(d) problems in obtaining sufficient appropriate audit evidence
Procedures where indications of fraud or error and fraud exist
Consider potential effect on the financial statements(materiality)
Perform additional procedures as necessary to confirm or dispel suspicion of fraud and error
If unable to obtain evidence to confirm or dispel suspicion of fraud and error, the auditor should consider the possible effect on the financial statements or should take legal advice before rendering any report or withdrawal from the engagement.
The auditor should communicate to management on a timely basis if fraud and error is actually found to exist or if he believes fraud or error may exist even if the potential effect on the financial statements is immaterial.