During the course of the audit of FF Financial, you find that some accounting entries have been altered. You believe this may be the result of management fraud and you have determined that the effect of this could be material to the financial statements. What steps should you take in response to the accounting entries and your concern about management fraud?

Question

What will be an ideal response?

Answer 1

In this situation, the auditor should attempt to obtain audit evidence to determine whether material fraud has occurred and, if so, its effect. The auditor should consider the implications for other aspects of the audit. If fraud is found in one account, there are chances the auditor will find fraud in other accounts, as well. The auditor needs to discuss the matter and the approach to further investigation with an appropriate level of management that is at least one level above those involved in committing the fraud and with senior managements. If appropriate, the auditor could suggest that management consult with legal counsel. If the results of the audit tests indicate a significant risk of fraud, the auditor should consider withdrawing from the engagement and communicating the reasons for withdrawal to the audit committee or others with equivalent authority and responsibility.