a.

Responsibilities of the auditor The auditor has a legal and regulatory responsibility for reporting on whether the financial statements show a “true and fair view” of the financial position and performance of the client. He is therefore only concerned with fraud and error that has a material effect on the true and fair view.

The auditor’s responsibility is to obtain reasonable assurance that the financial statements, taken as a whole, are free from material misstatement, whether caused by fraud or error. It is not the primary responsibility of the auditor to prevent or detect fraud or error, although the audit may act as a deterrent to fraud. Auditors may also discover error or fraud during the course of their audit work, but they are by no means certain to do so whenever error or fraud has occurred. It must be recognised that some material misstatements caused by fraud or error may go undetected, because of the inherent limitations in any audit and the fact that deliberate attempts may be made to conceal fraud from the auditor.

ISA 240 states the responsibilities of management and the auditor as follows:

i) The primary responsibility for the prevention and detection of fraud rests with those charged with governance of the entity and management; and

ii) An auditor conducting an audit in accordance with ISAs is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatement, whether caused by fraud or error.

The auditor should take the following steps when fraud or error is suspected:

i) Identify the extent and possible impact on the financial statements of The fraud or error. Document the facts fully in the audit files. Additional testing may be required to establish the likely extent of any misstatement;

ii) Consider the possible impact on other areas of the audit and on the overall assessment of audit risk. This may result in a revision of the original audit plan;

iii) The findings should be discussed with management, regardless of the extent of the problem, and management should be kept informed of developments;

iv) The auditor should determine the action that management should take. This should include the possibility of seeking legal advice if fraud is suspected;

v) The auditor should normally communicate on a formal basis to management at an appropriate level. In the case of a public interest entities, the auditor communicates formally with the board of directors or the audit committee. However, if management themselves are involved in a suspected fraud, the auditor should consider taking legal advice to decide the best course of action. In extreme cases, the auditor may feel it is appropriate to resign;

vi) The auditor should consider the impact on his audit report to the shareholders, in terms of any impact on the true and fair view presented by the financial statements; and

vii) The auditor should consider whether there is any requirement to report to appropriate authorities. This must be considered in the context of the auditor’s duty of confidentiality to his client.

b.

To reduce the frequency and cost of legal action, and to maintain the image of the audit profession in the mind of the public, it is in the interests of the profession to take steps to close the expectations gap. A number of strategies exist that could assist in closing the expectation gap include:

i. The audit profession should attempt to improve the general level of knowledge and understanding about the audit process. One such attempt has been made with updates to the auditing standards on auditor’s reports published by IFAC in 2015. These updates enhanced the auditor’s report to make it more relevant and transparent to users, for example, by introducing a new section on key audit matters, more requirements with regards to reporting going concern and improved descriptions of the responsibilities of the auditor;

ii. Controls over the auditing profession are important in enhancing public confidence;

iii. Significant guidance for auditors and management aimed at increasing quality and addressing issues such as going concern has been issued by standard setters, professional bodies and regulators. There has been an increased focus on corporate governance and the role that audit committees play in companies, reducing inconsistencies and enhancing quality;

iv. Open and candid communication between internal and external auditors, financial management and the audit committee is increasingly being seen as critical in helping reduce the expectation gap. Such communication helps the audit committee to perform their governance role with the necessary transparency and realistic expectations that will help achieve effective risk management;

v. Enhanced communication between the parties and confirmation of their respective roles and responsibilities should be presented in the audit committee and directors’ reports to the shareholders. This will ensure that users become much more aware of the various parties’ roles and responsibilities beyond the understanding they gain just from the audit report;

vi. The expectation gap will hopefully narrow further as financial reporting participants work together even more effectively to improve the deterrence and detection of financial reporting fraud. The level of success in narrowing the expectation gap is likely to vary considerably between territories depending on factors such as culture, ethics, the level of incidence of governance mechanisms beyond the minimum required by law and regulation and the quality, availability and transparency of corporate reporting;

vii. One thing that is certain is that audit committees are well positioned to play a vital role in reducing the expectation gap given their open and direct relationship with all the parties, including shareholders, board of directors, internal audit and external audit.

c.

A review of interim financial statements is very different from an audit of year- end financial statements. In an auditor’s report, positive assurance is given on the truth and fairness of the financial statements. The level of audit work will be commensurate with the level of the assurance given that is it will be regorious, testing the systems producing the accounts and the year-end figures themselves using a variety of appropriate procedures.

In the case of a review of interim financial statements, the auditor gives only negative assurance, that they have not found any indication that the interim accounts are materially misstated. The level of audit work will be much less penetrating, varied and detailed than in a full audit. The main audit tools used to obtain evidence will be analytical procedures and direct enquiries of the company’s directors.

d.

The circumstances presented insufficient evidence of a suspected non- compliance which include:

i. Falsification- of sales records;

ii. Repurchased inventories meant for return after year end;

iii. Capitalisation of cost of sales;

iv. Falsification of invoices;

v. Enjoyment of a bonus on fictitious sales;

vi. Limitation of scope of the audit by Managing Director as he precluded auditor from corroborating sales with independent third parts; and

vii. Restraining the auditors from examining service contracts or discussing company affairs with sales agent.

The nature of the report that would have been necessary is for auditor to disclaim opinion due to limitation scope.