[Fraud Deterrence] Josie is conducting an external audit of a company in a jurisdiction that is subject to International Standards on Auditing (ISAs). While conducting her audit procedures, she discovers evidence that Carissa, the company’s chief financial officer, has been fraudulently manipulating the financial statements. Which of the following is Josie’s BEST response to these findings?

According to International Standard on Auditing (ISA) 240, The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements, when an auditor identifies fraud or suspects fraud involving senior management, they have a professional duty to communicate these matters on a timely basis to those charged with governance (e.g., the audit committee or board of directors). This communication is crucial because those charged with governance have oversight responsibility for the organization's strategic direction and obligations related to accountability. Reporting to this level ensures that those with the authority to investigate and take corrective action are properly informed.

B. Josie should not disclose her findings to anyone until after she has conducted a full investigation. An external auditor's primary role is to opine on financial statements, not to conduct a full fraud investigation, which is outside the scope of a standard audit.
C. Josie should immediately report her findings to the local media. This action would be a severe breach of the auditor's professional duty of client confidentiality and is not an appropriate or legally sanctioned response.
D. Josie should confront Carissa with her audit findings and try to get a confession. Confronting a suspect is the role of a fraud examiner or investigator, not an external auditor. This can compromise evidence and is outside the auditor's mandate.

1. International Auditing and Assurance Standards Board (IAASB). (2009). International Standard on Auditing (ISA) 240

The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements.

Paragraph 42: "If the auditor has identified or suspects fraud involving: (a) Management; (b) Employees who have significant roles in internal control; or (c) Others where the fraud results in a material misstatement in the financial statements

the auditor shall communicate these matters to those charged with governance on a timely basis." This directly supports the correct answer (A).

2. Association of Certified Fraud Examiners. (2023). Fraud Examiners Manual

International Edition.

Section 1.405

"Auditing vs. Fraud Examination": This section distinguishes the roles

stating that auditing is a general examination while fraud examination is specific to resolving fraud allegations. It clarifies that an auditor's responsibility upon discovering potential fraud is to report it appropriately

not to conduct the investigation themselves

which refutes option (B) and (D).

3. Mock

T. J.

& Turner

J. L. (2005). Auditor's professional responsibility in the post-Enron environment. Research in Accounting Regulation

17

187-209.

Page 195: The article discusses auditing standards (including the principles in ISAs) that mandate communication of illegal acts

including fraud by management

to the audit committee or board of directors. This reinforces the auditor's reporting obligation to those charged with governance

as stated in option (A). DOI: https://doi.org/10.1016/S1052-0457(05)17008-X17008-X)