Question

Prior to or in conjunction with the information-gathering procedures performed during an audit, members of the audit engagement team are required to discuss the potential for material misstatement due to fraud. The discussion should include which of the following?

1) I. An exchange of ideas or 'brainstorming' among the audit team members, including the auditor with final responsibility for the audit, about how and where they believe the entity's financial statements might be susceptible to material misstatement due to fraud, how management could perpetrate and conceal fraudulent financial reporting, and how assets of the entity could be misappropriated
2) II. An emphasis on the importance of preventing fraud

Answer 1

The audit engagement team must brainstorm to identify areas where the entity's financial statements might be susceptible to fraud, including methods of fraudulent financial reporting and asset misappropriation. Preventing fraud is a management duty, while the audit team focuses on detection.

Step-by-step explanation:

During an audit, the discussion concerning the potential for material misstatement due to fraud should involve a concerted effort by the audit engagement team to brainstorm about the various areas where the entity's financial statements may be vulnerable. This exchange of ideas includes all team members and should specifically cover:

• How the financial statements could be susceptible to material misstatement due to fraud.
• Ways in which management might both perpetrate and conceal fraudulent financial reporting.
• Possible methods for the misappropriation of the entity's assets.

The discussion aims to promote professional skepticism and prepares the audit team to be vigilant for signs of fraud throughout the audit process. It is important to note that preventing fraud is also a responsibility taken seriously during an audit, but this is generally considered a management and governance duty, rather than a primary objective of the audit team, whose focus is on detection and reporting.