Consideration of Fraud in an Internal Audit (SIA-11)

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Consideration of Fraud in an Internal Audit (SIA-11)
  • Non-Compliance: Acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations. Such acts include transactions entered into by, or in the name of, the entity, or on its behalf, by those charged with governance, management or employees.
  • Effect of Laws and regulations:
    • Directly impacting Financial statements
    • Not impacting Financial statements
    • Non extreme cases of resulting in fines and dues
    • Extreme cases effecting going concern
  • Responsibility of Management: Management is primarily responsible for designing policies and procedures to ensure compliance with various laws and regulations.
  • Objectives and responsibilities of Internal auditor
    • Directly impacting Financial statements- “Obtain sufficient and appropriate audit evidence”.
    • Not impacting Financial statements- “Limited to undertaking specific audit procedures”
    • Performing of audit procedures to identify non-compliance.
    • Unlike the statutory audit, where non-compliance is identified with a view to obtain reasonable assurance that the financial statements are free from material misstatements, the responsibilities of an internal auditor are much wider.
    • Internal auditor shall not take risk management decisions, but suggest on risk management decisions.
    • Internal audit has inherent limitations and cannot be expected to detect non compliance with all laws and regulations.
    • Auditor can use technical advice form an expert in case non compliance is beyond his professional competences.
  • Internal Auditor considerations
    • The internal auditor is responsible for understanding the following
      • The legal, regulatory and the financial reporting framework applicable to the entity and the industry or sector in which the entity operates; and
      • How the entity is complying with that framework.
    • Written Representations
      • The internal auditor shall request management to provide written representations that all known instances of non-compliance, have been disclosed to the internal auditor.
    • Audit procedure when:
      • Non Compliance is not Identified => not required to perform further audit procedures
      • Non Compliance is Identified => understand the nature & circumstances and obtain further information with regard.
      • Indications of Non Compliance => further investigate in such areas.
    • Reporting
      • Reporting to management => non compliance
      • Reporting in internal audit report=> if non compliance has significant impact on functioning of entity
    • Documentation
      • The internal auditor shall document identified or suspected noncompliance with laws and regulations and the results of discussion with management.

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