11.10 External auditors and Management responsibility on error and frauds

Both external auditors and management have responsibilities when it comes to errors and frauds in financial statements:

1. External Auditors:
   • Detection and Assessment: External auditors are responsible for conducting an independent examination of the financial statements to detect material misstatements, including errors and frauds. They perform audit procedures to assess the risk of errors and frauds and obtain sufficient and appropriate audit evidence.
   • Reporting: If external auditors identify errors or indications of fraud during the audit, they have a duty to report these findings to management, those charged with governance, and, in some cases, regulatory authorities. The reporting should be clear, factual, and objective, and it may require modifications to the audit opinion or inclusion of explanatory paragraphs in the audit report.
   • Communication: External auditors communicate with management throughout the audit process to discuss identified errors or frauds, their implications, and recommendations for corrective actions. They may also provide guidance on strengthening internal controls to prevent and detect errors and frauds in the future.
   • Professional Skepticism: External auditors are required to maintain a skeptical mindset throughout the audit process, including considering the risk of fraud. They must exercise professional judgment and maintain professional skepticism to effectively identify and address errors and frauds.
2. Management:
   • Prevention and Detection: Management is responsible for establishing and maintaining an effective system of internal controls that aim to prevent and detect errors and frauds. They should implement policies, procedures, and controls to safeguard assets, ensure accurate financial reporting, and deter fraudulent activities.
   • Ethical Tone and Culture: Management plays a crucial role in setting an ethical tone and promoting a culture of integrity and honesty within the organization. They should communicate and enforce ethical standards, provide training and awareness programs, and encourage employees to report any suspected misconduct.
   • Corrective Actions: When errors or frauds are identified, management is responsible for taking prompt and appropriate corrective actions. This may involve conducting internal investigations, implementing control enhancements, disciplining or terminating individuals involved in fraudulent activities, and considering the need for restatement of financial statements if necessary.
   • Cooperation with Auditors: Management is expected to cooperate fully with external auditors, providing them with access to relevant information and personnel. They should address auditor inquiries and requests for documentation promptly and transparently to facilitate the audit process.