ASA 240 - The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report - April 2006

Administered by Department of the Treasury

Legislation au F2006L01368 Not in force Legislative Instrument

Legislation content

 (April 2006)

 

 

 

 

Explanatory Statement

 

ASA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report

 

 

Issued by the Auditing and Assurance Standards Board

 

Explanatory Statement

Reasons for Issuing ASA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report

The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report due to the requirements of the legislative provisions explained below.

The Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004 established the AUASB as an independent statutory body under section 227A of the Australian Securities and Investments Commission Act 2001, as from 1 July 2004. Under section 336 of the Corporations Act 2001, the AUASB may make Auditing Standards for the purposes of the corporations legislation. These Auditing Standards are legislative instruments under the Legislative Instruments Act 2003.

Process of making Auditing Standards

Section 1455 of the Corporations Act 2001 and Corporations Regulation 10.5.01 gave interim legal endorsement from 1 July 2004 to the majority of Auditing Standards made by the former Auditing & Assurance Standards Board of the Australian Accounting Research Foundation. The AUASB has reviewed the Auditing Standards and has proceeded to make them as legally enforceable Auditing Standards under the Corporations Act 2001.

The Auditing Standards have been made also in accordance with the Financial Reporting Council’s Strategic Direction to the AUASB dated 6 April 2005, pursuant to section 225 of the ASIC Act.

The Strategic Direction, inter alia, provides that the AUASB develops Auditing Standards that:

  • have a clear public interest focus and are of the highest quality;
  • use the International Standards on Auditing (ISAs) of the International Auditing and Assurance Standards Board (IAASB) as a base;
  • conform with the Australian regulatory environment; and
  • are capable of enforcement.

In implementing the Strategic Direction, the AUASB has undertaken a process of thorough review and revision that has:

  • addressed the enforceability of mandatory requirements;
  • clarified auditors’ obligations under the Auditing Standards;
  • provided for sector neutrality in the Auditing Standards; and
  • included other amendments as necessary.

Purpose of Auditing Standard ASA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report

The purpose of Auditing Standard ASA 240 is to establish mandatory requirements and to provide explanatory guidance on the auditor’s responsibility to consider fraud in an audit of a financial report and expand on how the standards and guidance in ASA 315 Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement, and ASA 330 The Auditor’s Procedures in Response to Assessed Risks, are to be applied in relation to the risks of material misstatement due to fraud.

Auditing Standard ASA 240 is to be read in conjunction with the Preamble to AUASB Standards, which sets out the intentions of the AUASB on how the Auditing Standards are to be understood, interpreted and applied.

Operative Date

This Auditing Standard is operative for financial reporting periods commencing on or after 1 July 2006.

Main changes from Auditing Standard AUS 210 (June 2004) The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report

The main differences between ASA 240 and AUS 210 are that in ASA 240:

  1. The word ‘shall’, in the bold-type paragraphs, is the terminology used to describe an auditor’s mandatory requirements, whereas an auditor’s degree of responsibility is described in AUS 210 by the word ‘should’.
  2. The explanatory guidance paragraphs provide guidance and illustrative examples to assist the auditor in fulfilling the mandatory requirements, whereas in AUS 210 some obligations are implied within certain explanatory paragraphs. Accordingly, such paragraphs have been redrafted to clarify that the matter forms part of the explanatory guidance.
  3. Explanatory guidance relating to the following matters, not contained in AUS 210, is included:

(a)                Legislation may require the auditor or a member of the audit team to maintain the confidentiality of information disclosed to the auditor by a person regarding contraventions or possible contraventions of the law. In such circumstances, the auditor or a member of the audit team may be prevented from communicating that information to management or those charged with governance in order to protect the identity of the person who has disclosed confidential information that alleges a breach of the law. Consequently, the auditor may need to consider the implications for the audit engagement (paragraph 102).

Consultation prior to issuing this Auditing Standard

The AUASB has consulted publicly as part of its due process in developing this Auditing Standard. Exposure Draft ED 12/05 Proposed Auditing Standard: The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report (Re-issuance of AUS 210) was issued on 28 October 2005 with a 45 day comment period. Submissions were received by the AUASB and it has considered these submissions as part of the development and finalisation of this Auditing Standard.

Overview

The Auditing and Assurance Standards Board (AUASB) introduced Auditing Standard ASA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report in 2006. This standard was enacted under the authority of the Corporations Act 2001 and was necessitated by the need for clear and enforceable guidelines regarding the auditor's responsibilities in detecting and addressing fraud within financial reports. The AUASB, established by the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004, operates independently to ensure high-quality auditing standards that align with both international best practices and the specific regulatory environment in Australia. Auditing Standard ASA 240 aims to mandate specific requirements and provide detailed guidance on how auditors should consider and respond to the risks of material misstatement due to fraud, ensuring a robust and transparent financial reporting process.

Scope and Application

The Auditing and Assurance Standards Board (AUASB) issues Auditing Standard ASA 240 The Auditor’s Responsibility to Consider Fraud in an Audit of a Financial Report pursuant to the Corporations Act 2001. This Auditing Standard applies to auditors of financial reports and is designed to ensure that auditors have a responsibility to consider the risk of material misstatement due to fraud in their audit processes. It sets out the mandatory requirements for auditors to assess and respond to the risks of fraud, particularly focusing on the evaluation of fraud risks and the implementation of appropriate responses. This Auditing Standard is applicable to all auditors in Australia who are engaged in auditing financial reports, encompassing a wide range of industries and entities. It extends its reach to financial reporting periods commencing on or after 1 July 2006. While the standard sets forth clear requirements, it also includes explanatory guidance to assist auditors in fulfilling these requirements effectively.

Key Provisions

Auditing Standard ASA 240, as issued by the Auditing and Assurance Standards Board (AUASB), sets out the auditor's responsibility to consider fraud in the context of an audit of a financial report (Section 1). The standard is underpinned by legislative provisions such as the Corporate Law Economic Reform Program (Audit Reform and Corporate Disclosure) Act 2004, which established the AUASB, and the Corporations Act 2001, which empowers the AUASB to make Auditing Standards (Sections 227A and 336). These Auditing Standards are legally enforceable instruments under the Legislative Instruments Act 2003. ASA 240 is specifically designed to expand on the auditor's responsibilities as outlined in other Auditing Standards, particularly ASA 315 and ASA 330, with regard to the risks of material misstatement due to fraud (Section 5). Auditors are required under ASA 240 to exercise professional skepticism and to conduct a thorough assessment of fraud risks (Section 2). This includes identifying and assessing the risks of material misstatement due to fraud, whether caused by either fraud or error, and designing and implementing responses appropriate to the assessed risks (Section 3). The standard mandates that the auditor should communicate effectively with those charged with governance about the susceptibility of the financial report to material misstatement due to fraud, and any significant fraud risks identified (Section 4). Additionally, ASA 240 outlines that the auditor must obtain sufficient appropriate audit evidence to provide a basis for the opinion on the financial report (Section 5). Breaching the requirements of ASA 240 can lead to significant consequences for auditors and the entities they audit. Under the Corporations Act 2001, an auditor who fails to comply with ASA 240 may be subject to penalties, including fines and disqualification from practicing as an auditor (Section 1317E). Furthermore, the failure to adequately consider fraud in an audit can result in civil liabilities for negligence or breach of duty, potentially leading to substantial damages and reputational harm. In cases where fraud is detected and the auditor fails to properly address it, the consequences can be both criminal and civil, including potential prosecution for misconduct and compensation claims from affected parties.

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