Hong Kong Auditing Standard: HKSA 240 and Fraud Detection Responsibilities for Auditors

Hong Kong’s auditing Standard, HKSA 240, focuses on the auditor’s responsibilities relating to fraud in an audit of financial statements. Effective for audits with periods beginning on or after December 15, 2009, this standard is based on the International Standard on Auditing (ISA) 240.

Identifying and Assessing Risks of Material Misstatement due to Fraud

• Fraudulent financial reporting: Manipulated financial figures made to deceive users
• Misappropriation of assets: Assets stolen, misused, or unintentionally misappropriated Auditors’ responsibility: Obtain reasonable assurance of financial statements’ accuracy

Detecting Fraud: Dependent Factors

• Skillfulness of perpetrator
• Frequency and extent of manipulation
• Degree of collusion
• Relative size and seniority of individuals involved

Risk of Material Misstatement due to Fraud vs Error

Higher risk of not detecting fraud material misstatement than error

Management’s Role in Preventing and Detecting Fraud

• Creates a culture of honesty and ethical behavior

Auditor’s Approach to Detecting Fraud

1. Professional skepticism
2. Unusual relationships
3. Evaluate fraud risks
4. Additional audit procedures
5. Test journal entries and adjustments
6. Review accounting estimates

HKSA 240’s Key Components

1. Adopt a presumption of fraud in revenue recognition
2. Design audit procedures based on assessed risks
3. Test management override of controls
4. Communicate risks to management and governance
5. Revenue recognition risks: HKSA 240 addresses this risk at the financial statement level

Conclusion

HKSA 240 emphasizes the importance of adopting a presumption of fraud during revenue recognition, designing audit procedures based on assessed risks, communicating identified risks to relevant parties, and effectively testing for management override of controls.