Review steps taken by cos to address frauds: ICAI to auditors

Auditors need to review steps taken by companies to deal with suspected frauds worth Rs 1 crore or more that have already been reported and satisfy themselves that the matter has been appropriately addressed, according to chartered accountants' apex body ICAI.
The latest guidance from the ICAI comes against the backdrop of auditors now being required to report suspected corporate frauds of Rs 1 crore and above to the central government.
The Institute of Chartered Accountants of India (ICAI) has recently issued a revised guidance note on reporting on fraud under Companies Act, 2013.
As per the note, in case an auditor comes across a suspected fraud involving Rs 1 crore or more which has already been reported, the auditor should then review the measures taken by the company to address it.

If the auditor is not satisfied with the steps taken in that regard, then he or she would have to state the reasons in writing, it said.
In such cases, the auditor should ask the "management/ those charged with governance to perform additional procedures to enable the auditor to satisfy himself that the matter has been appropriately addressed".

"If the management/those charged with governance fail to undertake appropriate additional procedures within 45 days of his request, the auditor would need to evaluate if he should report the matter to the central government...," the note said.
Among others, the guidance note has provided examples relating to the two types of fraud relevant to the auditor's consideration -fraudulent financial reporting and misappropriation of assets.

ICAI said there are generally three conditions present when material misstatements happen due to fraud. They are "incentives/pressures, opportunities, and attitudes/ rationalisations," it added.
Under the Companies Act, 2013, auditors are required to report to the government when they come across instances of fraud at a firm and the threshold in this regard is Rs 1 crore.
ICAI has also said the auditor should apply professional skepticism to evaluate or verify that the fraud was indeed identified in all aspects by the management or through the company's vigil/whistle blower mechanism.
This would ensure that a distinction is "clearly made with respect to frauds identified/detected due to matters raised by the auditor vis-a-vis those identified/detected by the company through its internal control mechanism," the guidance note said.