Auditor's versions regarding the identification and assessment of risks of financial statements' essential distortion

Abstract

The paper discusses the problematic issues of identification and assessment of the risks of significant distortion by the auditor based on a hypothetical judgment in the form of a version regarding their committing as a result of fraud. It was found that business risks are the main source of creating the motivation and pressure on management personnel regarding financial reporting distortions. Depending on a number of circumstances, they may have a positive or negative assessment from the management staff. The creation of the version by the auditor is proposed to be carried out based on the knowledge of the criminological characteristics of fraud and methods of its commission. And, at the same time, to be guided by the approach, outlined in ISA 240 and ISA 315 regarding the criminological characteristics of fraud and the methods of its commission, as well as the circumstances that generate it. International Standards on Auditing (ISA) require the auditor to follow the professional skepticism over the audit, to admit the possibility of material misstatement due to fraud, despite the auditor's past experience with regard to integrity and honesty of management personnel and those, who is endowed with the highest authority (clause 15 of ISA 200 and clause 12 ISA 240). It has been established that the principle of professional skepticism requires the auditor the in-depth assessment of the risks of material distortion of financial statements, obliges to make assumptions on the presence of opportunities for fraud in the business entity's activity in each audit, regardless of the positive characteristics of the management staff. The knowledge of such assumptions requires the auditor to make hypothetical judgments in the form of a version., the audit plan is prepared based on the judgments.