A friend has asked you for some advice. She owns some shares in S, a large quoted entity. The external auditor of her entity has recently been criticized for failing to detect a staff fraud. The...

A friend has asked you for some advice. She owns some shares in S, a large quoted entity. The external auditor of her entity has recently been criticized for failing to detect a staff fraud. The auditor has rejected the criticisms on the grounds that the fraud was not, in itself, material and, in any case, it is not the auditor’s responsibility to prevent or detect all fraud.

Requirements

(a) Explain what is meant by ‘materiality’ and describe the importance of the concept of materiality in the audit process.

(b) Describe the auditor’s duties with respect to the financial statements, explaining why it is not the auditor’s duty to detect all fraud.