i) Difference in prevention and detection of fraud:

• Internal auditors:
  • They are actively involved in the prevention of fraud by evaluating and improving the effectiveness of internal controls. Internal auditors often conduct tests specifically designed to detect fraud or irregularities as part of their internal control reviews.
  • Internal auditors are more likely to be involved in both preventing and detecting fraud through routine monitoring and risk assessments.
• External auditors:
  • External auditors are not primarily responsible for preventing fraud. However, ISA 240 requires that external auditors assess the risk of material misstatements due to fraud and design audit procedures to detect fraud if it exists. Their role is more focused on detection rather than prevention.
  • The external auditor’s responsibility for fraud detection is limited to obtaining reasonable assurance that the financial statements are free from material misstatements caused by fraud.

(5 marks = 2.5 marks each)

ii) Difference in reporting of fraud:

• Internal auditors:
  • Internal auditors report fraud directly to senior management or the audit committee, as they are part of the organization’s governance structure. They provide ongoing reports and make recommendations to improve controls and mitigate risks of fraud.
• External auditors:
  • External auditors must report suspected or detected fraud to those charged with governance (e.g., the board of directors or audit committee). If fraud involves senior management or the detected fraud is material, they are required to communicate this to the appropriate authorities, as mandated by professional and legal standards. In extreme cases, external auditors may report the fraud to external bodies if public interest is involved.