ISSAI 1240
ISSAI 1240 ISSAI 1240
ISSAI 1240 practice note 240 Communications to Regulatory and Enforcement Authorities P21. The requirements for reporting of fraud in the public sector may be subject to specific provisions of the audit mandate or related legislation or regulation, in line with paragraph 43 of the ISA regarding communication to a party outside the entity. Such parties may include regulatory and enforcement authorities. In some environments, there may be a duty to refer indications of fraud to investigative bodies and even cooperate with such bodies to determine if fraud or abuse has occurred. In other environments, public sector auditors may be obliged to report circumstances that may indicate the possibility of fraud or abuse to the competent jurisdictional body or to the appropriate part of the government or legislature, such as prosecutors, the police and (if relevant to legislation) affected third parties. Public sector auditors take care to avoid interfering with potential investigations or legal proceedings. Public sector auditors need to be familiar with applicable laws and regulations in regard to reporting, communication and documentation of indications or suspicions of fraud. Furthermore, public sector auditors consider the need to obtain legal advice in issues regarding indications of fraud. 226 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
ISSAI 1240 practice note 240 Appendix 1: Examples of Additional Fraud Risk Factors in the Public Sector Environment The fraud risk factors identified in this appendix are examples of such factors that may be faced by public sector auditors. Although the risk factors cover a broad range of situations, they are only examples and, accordingly, public sector auditors may identify additional or different risk factors. Not all of these examples are relevant in all circumstances, and some may be of greater or lesser significance in public sector entities of different sizes or with different characteristics or circumstances. Also, the order of the examples of risk factors provided is not intended to reflect their relative importance or frequency of occurrence. Risk Factors Relating to Misstatements Arising from Fraudulent Financial Reporting Risk factors that relate to misstatements arising from fraudulent financial reporting are classified according to the three conditions generally present when fraud exists: incentives/pressures, opportunities, and attitudes/rationalization. The following are examples of risk factors relating to misstatements arising from fraudulent financial reporting. Incentives/Pressures Financial instability or threats by political, economic, budget, or entity operating conditions, such as (or as indicated by): • Weak budgetary controls; • Privatizations; • New programs; • Major changes to existing programs; • New financing sources; • New legislation and regulations or directives; • Political decisions such as relocation of operations; • Programs without sufficient allocated resources and funding; • Procurement of goods and services in certain industries such as defense; • Outsourcing of government activities; • Operations subject to special investigations; • Changes in political leadership; • Public and private partnerships. Excessive pressure exists for management to meet the requirements or expectations of third parties or those charged with governance due to the following: • Increased public expectations; • Higher than normal expectations to meet budget; • Reduction in budgets without corresponding reduction in service delivery expectations. The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements 227
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<strong>ISSAI</strong> <strong>1240</strong><br />
practice note 240<br />
Communications to Regulatory and Enforcement Authorities<br />
P21. The requirements for reporting of fraud in the public sector may be subject to specific provisions<br />
of the audit mandate or related legislation or regulation, in line with paragraph 43 of the ISA<br />
regarding communication to a party outside the entity. Such parties may include regulatory and<br />
enforcement authorities. In some environments, there may be a duty to refer indications of fraud<br />
to investigative bodies and even cooperate with such bodies to determine if fraud or abuse has<br />
occurred. In other environments, public sector auditors may be obliged to report circumstances<br />
that may indicate the possibility of fraud or abuse to the competent jurisdictional body or to the<br />
appropriate part of the government or legislature, such as prosecutors, the police and (if relevant<br />
to legislation) affected third parties. Public sector auditors take care to avoid interfering with<br />
potential investigations or legal proceedings. Public sector auditors need to be familiar with applicable<br />
laws and regulations in regard to reporting, communication and documentation of indications<br />
or suspicions of fraud. Furthermore, public sector auditors consider the need to obtain legal<br />
advice in issues regarding indications of fraud.<br />
226 The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements
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