A Deep Dive into ISA 240 (Revised): The Auditor’s Responsibilities Relating to Fraud

In recent years, financial scandals and corporate failures have reignited global attention on the auditor’s role in detecting fraud. Stakeholders—including regulators, investors, and the public—are increasingly questioning whether auditors are doing enough to detect and respond to fraudulent activities during financial statement audits. In response to this concern, the International Auditing and Assurance Standards Board (IAASB) has taken a significant step to strengthen the expectations and responsibilities of auditors with the proposed revisions to International Standard on Auditing (ISA) 240.

Background

The existing ISA 240, titled "The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements," outlines the auditor’s obligation to obtain reasonable assurance that financial statements are free of material misstatement, whether caused by error or fraud. However, increasing complexity in financial reporting, evolving fraud schemes, and public scrutiny have revealed the need for more robust guidance.

In February 2024, the IAASB released the Exposure Draft of ISA 240 (Revised). The proposed changes aim to modernize the standard, promote deeper fraud-focused audit procedures, and clarify the scope of the auditor's responsibilities. This article explores the core components of the revised standard, the rationale behind the changes, and the implications for auditors and stakeholders.

Key Objectives of the Revised ISA 240

The proposed revision of ISA 240 is driven by three fundamental objectives:

Enhance auditors’ focus on fraud throughout the audit process.
Strengthen the application of professional skepticism and risk assessment in response to fraud indicators.
Clarify and modernize existing requirements to reflect current audit practices and stakeholder expectations.

Enhanced Professional Skepticism

At the heart of the revised ISA 240 is a renewed emphasis on professional skepticism—a key component of audit quality. The revised standard urges auditors to:

Maintain a questioning mindset throughout the audit, especially when evaluating management’s judgments and estimates.
Challenge inconsistent or contradictory evidence, even when it comes from management.
Consider the possibility of collusion, particularly in environments with weak internal controls or high incentives for earnings manipulation.

This shift reinforces the principle that skepticism is not just a procedural formality—it’s a protective mindset that helps detect subtle or concealed fraud schemes.

Strengthened Risk Assessment Procedures

The updated ISA 240 expands the auditor’s responsibility in identifying and assessing fraud risks. Key enhancements include:

More robust inquiries of management, those charged with governance, and others within the entity.
Encouraging auditors to look beyond materiality when identifying fraud risks—highlighting that non-material fraud could indicate wider integrity concerns.
Requiring auditors to integrate fraud risk considerations into all aspects of audit planning and execution, including control testing and substantive procedures.

The revised standard also mandates a greater focus on management override of controls, a common pathway for financial statement fraud.

Enhanced Audit Procedures and Documentation

In response to identified fraud risks, ISA 240 (Revised) outlines clearer expectations for audit procedures. These include:

Unpredictable audit procedures: Auditors must introduce elements of unpredictability to deter potential fraud concealment.
Journal entry testing: Increased attention to high-risk or unusual journal entries and manual adjustments.
Analytical procedures: Enhanced guidance on applying data-driven techniques to detect anomalies.

Additionally, documentation requirements have been strengthened. Auditors must now explicitly record:

Their assessment of fraud risks.
The rationale behind their audit response strategy.
Evidence of how professional skepticism was applied during the audit.

Clearer Communication Expectations

ISA 240 (Revised) introduces new requirements regarding communication of fraud-related matters. These include:

Timely communication of suspected or actual fraud to those charged with governance.
Evaluating the need to report to regulators or legal authorities in appropriate circumstances.
Including transparency in the auditor’s report about the auditor's responsibilities and actions taken in relation to fraud.

This ensures that fraud risks and related audit actions are not only addressed but are also clearly disclosed to oversight bodies and stakeholders.

Scalability and Proportionality

One of the criticisms of previous audit standards was their complexity when applied to small and less complex entities (LCEs). ISA 240 (Revised) addresses this through scalable guidance, making it more adaptable for varying organizational sizes and complexities.

Auditors are provided with examples and considerations to tailor procedures in a way that maintains audit quality without imposing unnecessary burdens on smaller clients.

Effective Date and Implementation Timeline

The IAASB’s exposure draft was open for public comment until June 5, 2024. A revised draft is expected to be considered in March 2025, with final approval likely to follow later that year. If approved, the standard is expected to become effective for audits of financial statements for periods beginning late 2025 or early 2026.

Conclusion

The revision of ISA 240 reflects the global auditing profession’s proactive response to increasing demands for fraud-focused audits. By reinforcing professional skepticism, expanding risk assessment, enhancing documentation, and promoting transparent communication, ISA 240 (Revised) will equip auditors with a more rigorous framework to detect and respond to fraud.

Ultimately, the revised standard seeks to restore trust in the audit process and reaffirm the auditor’s role as a critical line of defense in financial integrity.

Sources

International Auditing and Assurance Standards Board (IAASB): Proposed ISA 240 (Revised) Exposure Draft – 2024
IFAC Public Comment Documents, 2024

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