ASB Issues New Exposure Draft on Fraud

Fraud has always been one of the hottest topics in auditing. This summer, the Auditing Standards Board (ASB) released an exposure draft clarifying the auditor’s role in fraud. The proposed Statement on Auditing Standards (SAS), titled “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements,” was issued on July 2, 2025. Once finalized, it will supersede AU-C Section 240 and make targeted amendments to other AU-C sections. This article explores the background behind the project, the research that informed it, and the key proposed changes auditors should know.

Why Did the ASB Take on This Project?

There were two primary drivers behind the ASB’s decision to revisit the fraud standard.

First, there has been persistent public interest in what auditors should be expected to do when detecting fraud. Regulators, investors, and the public have questioned whether auditors are doing enough. The exposure draft responds by clarifying responsibilities, emphasizing professional skepticism, and strengthening fraud-related procedures.

Second, the ASB wanted to stay aligned with other standard setters. The International Auditing and Assurance Standards Board (IAASB) issued a revised fraud standard earlier this year, and the Public Company Accounting Oversight Board (PCAOB) has its own project underway. While the PCAOB has not yet finalized its standard, the ASB is monitoring progress to ensure consistency.

A Research-Driven Approach

A hallmark of this project is the depth of research. The ASB synthesized academic studies published between 2017 and 2022, reviewed findings on fraud identification and response, and sought feedback directly from practitioners and financial statement users.

The outreach included:

• 134 survey responses from financial statement users and preparers.
• 26 interviews with U.S.-based stakeholders.
• Input from 26 forensic professionals across firms of all sizes.

The forensic experts offered particularly valuable perspective, highlighting strategies that work in practice. Their insights shaped several of the proposed changes.

Insights from Forensic Experts

Key recommendations from forensic professionals included:

1. Evolving brainstorming — Treat brainstorming as an ongoing conversation, not a one-time session, and involve the entire engagement team.
2. Adding unpredictability — Vary procedures, timing, and staffing so fraudsters cannot anticipate the auditor’s approach.
3. Sharpening inquiries — Senior team members should lead fraud-related inquiries, asking deeper follow-ups while junior staff observe and document.
4. Requiring corroboration — Inquiry alone is insufficient. Auditors should seek documentation or other evidence.
5. Watching management red flags — Life events such as divorce, financial strain, or litigation can raise fraud risk. Background checks may sometimes be appropriate.
6. Using data analytics critically — Results should be interpreted thoughtfully and compared to benchmarks or nonfinancial data to spot anomalies.

Key Elements of the Exposure Draft

The proposed SAS contains many provisions, but 12 stand out:

1. Auditor’s responsibilities — Clarified and placed first in the standard, while management retains primary responsibility for prevention and detection.
2. Professional skepticism — Auditors must stay alert to fraud risk throughout the audit, regardless of past experiences with management.
3. Risk identification and resources — The engagement partner must ensure adequate resources, consider additional fraud risk sources, review prior estimates, and evaluate control deficiencies tied to fraud.
4. Fraud risk factors — Strengthened requirements with clearer guidance in the application section.
5. Risk of material misstatement — Fraud risks must be identified at both the financial statement and assertion levels, with explicit evaluation of management override.
6. Responses to risks — Auditors must remain objective and open to contradictory evidence, with heightened focus on testing journal entries and management override.
7. Fraud or suspected fraud — Structured steps are introduced, including documenting detection methods and requiring partner evaluation.
8. Stand-back provision — Auditors must reassess fraud risk after procedures to confirm sufficient evidence was gathered.
9. Communications with governance — Stronger expectations for timely, ongoing communication with management and those charged with governance.
10. Fraud-related inquiries — Enhanced expectations, including asking governance about control deficiencies.

Looking Ahead

The ASB’s exposure draft is a significant step toward clarifying the auditor’s role in fraud detection and aligning U.S. standards with international practice. While the final standard will likely evolve based on public comments, the direction is clear: auditors must demonstrate greater skepticism, dig deeper when risks are present, and treat fraud risk assessment as integral to the audit, not a box-checking exercise.

Comments are requested by October 3, 2025. If issued as final, the proposed SAS will be effective for audits of financial statements for periods ending on or after December 15, 2028, with early implementation permitted. To view the full exposure draft can be found at https://bit.ly/3VDerfP.