Final answer:
Auditors are responsible for obtaining reasonable assurance that financial statements are free of material misstatement due to fraud or error during an audit engagement of a nonissuer. They must maintain professional skepticism, consider the implications of potential fraud, reassess risks, and carry out necessary audit procedures. Communication with management and those in governance roles, and sometimes regulatory authorities, is required if fraud is detected or suspected.
Step-by-step explanation:
When dealing with the issue of fraud encountered during an audit engagement of a nonissuer, auditors must adhere to certain professional standards and guidelines. Auditors are responsible for conducting the audit to obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by fraud or error.
According to auditing standards, if an auditor encounters fraud or has substantial reason to believe fraud may exist, they must first consider the implications for the integrity of management or employees and the effect on the audit. They should also reassess the risk of material misstatement due to fraud and determine the necessary audit procedures. In addition, they must communicate these issues as required to management and those charged with governance, and in some cases, may also have to report to regulatory authorities depending on jurisdiction and the nature of the fraud.
Auditors are not responsible for preventing fraud, but they are expected to maintain professional skepticism throughout the audit, considering the potential for management override of controls. They should look for evidence that points to fraud such as discrepancies in accounting records, conflicting or missing evidential matter, and problematic or unusual relationships between the auditor and management. Audit engagements should always be conducted in accordance with the relevant auditing standards, which in the United States are generally accepted auditing standards (GAAS) or Public Company Accounting Oversight Board (PCAOB) standards for public companies (issuers).