a. Auditor’s Responsibility for Fraud Detection and Procedures for Suspected Fraud: Auditors have a duty to exercise professional skepticism and perform procedures to detect fraud that could materially misstate financial statements. However, the auditor’s role is not to guarantee fraud-free financials but to detect significant fraud through risk assessment and testing.

When fraud is suspected, procedures include:

• Enhanced Risk Assessment: Perform fraud risk assessments focusing on areas vulnerable to management manipulation.
• Substantive Testing: Conduct detailed testing on revenue recognition, especially sales to agents, inventory at year-end, and capitalized expenses.
• Third-Party Confirmation: Obtain external confirmations from sales agents and suppliers where feasible, despite limitations imposed by management.
• Inquiry with Internal Audit: Engage with the internal audit function to determine if they identified unusual patterns.

b. Strategies to Close the Expectation Gap: To manage the gap between public expectations and the auditor’s role:

• Enhanced Communication: Educate stakeholders on audit limitations, emphasizing that audits provide reasonable—not absolute—assurance.
• Expanded Auditor Reporting: Use clearer language in audit reports, explaining responsibilities for fraud detection and limitations.
• Public Awareness Campaigns: Professional bodies could initiate public campaigns to inform the public of auditors’ roles.
• Increase Engagement Transparency: Auditors can include specific language about limitations faced (e.g., restrictions imposed by management).

c. Difference Between Review Report and Audit Report: A review report provides limited assurance that nothing has come to the auditor’s attention to indicate material misstatement. It involves analytical procedures and inquiry, without the extensive testing required for an audit. In contrast, an audit report provides reasonable assurance through more comprehensive testing and verification procedures.

d. Necessary Reports Based on Managing Director’s Activities: The following reporting could be required:

• Qualified Opinion or Disclaimer: If material misstatements were undetected due to imposed limitations, a modified opinion may be needed in the year-end audit report.
• Emphasis of Matter: An emphasis of matter paragraph may draw attention to significant uncertainty or unusual practices impacting financial reporting.
• Report to Governance: Inform the board and audit committee of restrictions encountered and any significant findings.