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The Auditor’s
Responsibility
Auditing and Assurance Principles
ACCTG 109
1st Semester
A.Y. 2022-2023

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Learning Objectives
• Understand the auditor’s responsibilities relating to fraud and error in the audit of
financial statements.

• Know the basic characteristics of fraud and the incentives, opportunities, attitudes and
rationalizations that could lead to their occurrence.

• Learn how to assess whether the risk that fraud and error would result to material
misstatement of the financial statements.

• Describe how the auditor could detect fraud and error.

• Learn the risk factors relating to misstatement arising from fraudulent financial
reporting.

• Know how to minimize risk arising from management’s non-compliance with laws and
regulations.

• Know the auditor’s responsibility relating to noncompliance with laws and regulations

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What is the
Auditor’s
Responsibility?
Auditor’s Responsibility

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Auditor’s Responsibility
• The auditor’s responsibility is to design the audit to provide
reasonable assurance of detecting material misstatements
in the financial statements.
• These misstatements may emanate from:
Error
Fraud
Noncompliance with Laws and Regulations

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Error
Auditor’s Responsibility

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What is Error?
It refers to unintentional misstatements in the financial
statements, including the omission of an amount or a
disclosure.
Examples:
• Mathematical or clerical mistakes
• Incorrect accounting estimates
• Mistake in application of accounting policies

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Classification of Errors
• Error of Principle
• Errors of Omission
• Errors of Duplication
Clerical Errors
• Errors of Commission
• Compensating Errors

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Error of Principle
The recording of the items of transactions are not done according to the Principle of Accounting.
Examples:
• Providing excessive or inadequate depreciation
• Where the provision for outstanding expenses or prepaid expenses is wrong
• Where revenue expenses may be treated as capital expenditure or vice versa
• Where valuation of Plant & Machinery, Stock, investment and other assets are not done according to
the Principle of Accounting.
• Where income received is credited to personal account of the person who is making the payment; for
example, commission received from Mr. A credited to Mr. A’s account instead of the commission
account, it will increase creditors in the BalanceSheet and reduce profit in the Profit & Loss account.
• Where the payment of expenses is posted to the personal account of a person who receives payment;
for example, the rent paid to Mr. A wrongly debited to Mr. A’s account, it will increase profit and also
increase debtors in the Balance-sheet.

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Errors of Omission
When the transactions are not recorded in the books of original entry
or posted to the ledger.
Examples:
• Omission of purchase or sale from the purchase day book or the sale day
book respectively.
• Omission of outstanding or unpaid expenses.
• Where total of purchase day book or sale day book omitted to be posted in
purchase or sale account respectively.
• Where payment or receipt transaction omitted to be recorded in ledger
account from cash book.

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Errors of Duplication
When the transaction is recorded more than once.
Example:
• purchase may be recorded twice with original and duplicate copy
of purchase invoice, etc.

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Errors of Commission
When the amount of transaction or entry is incorrectly recorded in the
accounting books/ledger.
Examples:
• Purchase of goods for Php25,000 wrongly entered as Php2,500 in purchase book.
• Credit purchase from AB Company wrongly credited to BA Company’s account.
• Wrong totaling − total of purchase day book is totaled as Php112,500 instead of
Php121,500.
• Purchase from AB Company wrongly debited to AB company account instead of
crediting AB company account and debiting purchase account.

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Compensating Errors
When two or more errors are committed in such a way that
the result of these errors on the debits and credits is nil.
Example:
• the wages expense could be too high by Php2,000 due to one
error, while the cost of goods sold could be too low by Php2,000
due to a compensating error.
• the revenue account balance could be too low by Php5,000, but it
is offset by a compensating error in the same amount in the
utilities expense account

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Fraud
Auditor’s Responsibility

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What is Fraud?
• It refers to intentional act by one or more individuals among
management, employees, or third parties which results in
misrepresentation of financial statements.

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Types of Fraud
• Fraudulent Financial Reporting (Management Fraud)
• Misappropriation of assets (Employee Fraud)

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Fraudulent Financial Reporting (Management

Fraud)
It involves intentional misstatements or omissions of amounts or
disclosures, usually done by members of management or those
charged with governance.
Examples:
• manipulation of documents or • recording of transactions w/o
records substance
• misrepresentation of effects of • intentional application of
transactions accounting policies

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Misappropriation of assets (Employee Fraud)

Fraud that is accompanied by false or misleading records in
order to conceal the fact that assets are missing.
Examples:
• embezzling receipts
• stealing entity’s assets
• lapping of Accounts Receivables

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Fraud Risk Factors relating to Misstatements

resulting from Fraud
Fraudulent Financial Reporting Misappropriation of Assets
(Management Fraud) (Employee Fraud)

1. Management’s Characteristics and Influence Over Control 1. Susceptibility of Assets to Misappropriation

Environment • These fraud risk factors pertain to the nature of an entity’s
• These fraud risk factors pertain to management’s abilities, assets and the degree to which they are subject to theft.
pressures, styles, and attitude relating to internal control and Examples: large amount of cash on hand, inventory characteristics,
financial reporting process. easily convertible assets, etc.
Examples: non-financial management participates excessively, high
turn-over of management.., etc.)
2. Industry Conditions 2. Controls
• These fraud risk factors involve the economic and regulatory • These fraud risk factors involve the lack of controls designed to
environment in which the entity operates. prevent or detect misappropriation of assets.
Example: new accounting/statutory requirements that impairs Examples: lack of appropriate management oversight, inadequate
financial stability of the entity record keeping of assets, poor physical safeguards, lack of timely
documentation for transactions
3. Operating Characteristics and Financial Stability
• These fraud risk factors pertain to the nature and complexity of
the entity and its transactions, the financial condition, and
profitability.
Example: inability to generate cash flows while reporting earnings
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Responsibility for the Prevention and

Detection of Fraud
The responsibility for the prevention and detection of fraud and error
rests with both
• management
• those charged with governance of the entity.

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Responsibility for the Prevention and

Detection of Fraud
• Management – to establish a control environment and to implement
internal control policies designed to ensure the detection and
prevention of fraud and error.
• Individuals charged with governance – to ensure the integrity of
entity’s accounting and financial reporting systems

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Auditor’s Responsibility
• The auditor is not and cannot be held responsible for the prevention
of fraud and error.
• The auditor’s responsibility is to design the audit to obtain
reasonable assurance that the financial statements are free from
material misstatements whether caused by error or fraud.

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Audit Procedure relating to Fraud

PHASE 1 PHASE 2 PHASE 3 PHASE 4
Plan and design an audit Perform tests of controls Perform analytical Complete the audit and
approach and procedures and tests of issue an audit report
substantive tests of details of balances
transactions
Planning Phase Testing Phase Completion Phase Reporting Phase
6. When the auditor
1. Make inquiries of 3. Perform procedures necessary to determine whether 5. The auditor believes that
material error/fraud
management about material misstatements exist. should obtain a exists, he should
possibility of written request the
management to
misstatement 4. Consider whether such a misstatement resulted from representation
revise the financial
from the
error or fraud. (Errors will only result to adjustment of FS statements.
client’s 7. If the auditor is
2. Assess the risk that but fraud may have other implications on an audit) management unable to evaluate
the effect of fraud
fraud/error may cause on financial
the financial statements statements, the
auditor should either
to contain material qualify or disclaim
misstatements. his opinion on the
financial statements

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Noncompliance with
Laws and Regulations
(NOCLAR)
Auditor’s Responsibility

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Noncompliance with Laws and Regulations

This refers to acts or commission by the entity being audited,
either intentional or intentional, which are contrary to the
prevailing laws or regulations.
Tax evasion
violation of environmental protection laws
inside trading of securities
violation of SEC requirements

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Responsibility of the Management

• It is the responsibility of the management, with the oversight of those
charged with governance, to ensure that the entity’s operations are
conducted in accordance with laws and regulations.
• The responsibility for the prevention and detection of noncompliance
rests with management.

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Auditor’s Responsibility
• An audit cannot be expected to detect noncompliance with all laws
and regulations.
• The auditor should recognize that noncompliance by the entity with
laws and regulations may materially affect the financial statements.

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Audit Procedure relating to NOCLAR

PHASE 1 PHASE 2 PHASE 3 PHASE 4
Plan and design an audit Perform tests of controls Perform analytical Complete the audit and
approach and procedures and tests of issue an audit report
substantive tests of details of balances
transactions
Planning Phase Testing Phase Completion Phase Reporting Phase
1. Obtain a general 6. When the auditor
4. When the auditor is aware concerning instance of 6. The auditor believes that there is
understanding of the legal noncompliance, the
should obtain a
and regulatory framework noncompliance, evaluate the possible effect on the written
auditor should
applicable to entity request the mgmt. to
financial statements. representation revise the
2. Design procedures to help FS. Otherwise, a
from the
identify instances of qualified or adverse
5. When the auditor believes there maybe noncompliance, client’s opinion will be issued.
noncompliance with laws
and regulations the auditor should document the findings, discuss them management. 7. If a scope
limitation has
3. Design audit procedures to with management and consider the implication on other precluded the auditor
from obtaining
obtain sufficient appropriate aspects of the audit. sufficient appropriate
audit evidence about evidence, the auditor
should express a
compliance with laws and qualified opinion or a
regulations disclaimer of opinion.

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Auditor’s Responsibility
• Auditors are primarily concerned with the noncompliance what will
have a direct and material effect in the financial management.
• Noncompliance may involve conduct designed to conceal it such as
• Collusion
• Forgery
• Senior management override of controls
• failure to record transactions; or
• Intentional misrepresentations being made to auditor.

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Jay S. Molina, CPA, MM

jsmolina@dhvsu.edu.ph

Thank You! Don Honorio Ventura State University

“𝙎𝙪𝙘𝙘𝙚𝙨𝙨 𝙞𝙨 𝙖𝙘𝙝𝙞𝙚𝙫𝙚𝙙 𝙣𝙤𝙩 𝙗𝙮 𝙙𝙤𝙞𝙣𝙜 𝙤𝙣𝙡𝙮

𝙬𝙝𝙖𝙩 𝙞𝙨 𝙘𝙤𝙢𝙛𝙤𝙧𝙩𝙖𝙗𝙡𝙚 𝙖𝙣𝙙 𝙘𝙤𝙣𝙫𝙚𝙣𝙞𝙚𝙣𝙩. 𝙄𝙩
𝙞𝙨 𝙗𝙪𝙞𝙡𝙩 𝙗𝙮 𝙙𝙤𝙞𝙣𝙜 𝙬𝙝𝙖𝙩 𝙢𝙪𝙨𝙩 𝙗𝙚 𝙙𝙤𝙣𝙚 𝙩𝙤
𝙧𝙚𝙖𝙘𝙝 𝙞𝙩.”

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