Opinion on the Standard Setting to Address Risks of Fraud in an Audit (Business Accounting Council, Japan)

1. Background
Under current Auditing Standards, an auditor is required to perform an audit
including maintaining professional skepticism and assessing the risks of material misstatement due to fraud or error, reflecting the results of such assessment in the audit plan and conducting the audit based on the plan. However, since fraud is an intentional act which involves deception, the risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error. In addition, the risk of not detecting a material misstatement resulting from management fraud is greater than for employee fraud because fraud involving management is often executed by overriding internal controls.

In connection with the recent succession of cases involving fraud, it has been suggested that the requirements for the auditor under the current Auditing Standards are not sufficiently clear when there are any circumstances that indicate the possibility of a material misstatement due to fraud. As a result, this has caused inconsistency in audit practice. It has also been suggested that if there are any such circumstances, the audit procedures should be performed in a more cautious manner in light of the characteristics of fraud.

Accordingly, the Audit Committee, a sub-committee on auditing standards of
the Business Accounting Council has decided to establish a new standard titled “Standard to Address Risks of Fraud in an Audit” (hereinafter referred to as “Standard to Address Risks of Fraud” or “this Standard”), in order to clarify audit procedures to address the risks of material misstatements due to fraud and to require more cautious performance of audit procedures in certain specific circumstances.

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