In August 2026, the American Institute of CPAs’ Auditing Standards Board (ASB) adopted new guidance that clarifies and enhances auditors’ responsibilities related to fraud. Statement on Auditing Standards No. 151 doesn’t suddenly make auditors responsible for preventing or uncovering every instance of fraud. Instead, it gives auditors more specific instructions about how to assess fraud risks, maintain professional skepticism, and respond appropriately when fraud or suspected fraud is identified.
Setting Expectations
A financial statement audit doesn’t guarantee protection against fraud, especially if management is involved in the scheme and intentionally misleads auditors. Instead, it provides reasonable assurance that the company’s financial statements are free from material misstatement (whether due to fraud or error) and conform to U.S. Generally Accepted Accounting Principles or another comprehensive basis of accounting.
External audits can’t safeguard against “creative accounting” or inadvertent errors. Management remains primarily responsible for preventing and detecting fraud.
Addressing Fraud Risks
Auditors play a crucial role in maintaining public trust in the integrity of financial reporting. Some examples of specific audit procedures that address the risk of material misstatement due to fraud are:
Risk assessments. As part of the assessment process, auditors analyze the company’s operations, financial reporting processes, internal controls and industry environment to pinpoint potential fraud risks. Under the new standard, auditors are expected to apply a “fraud lens” when performing risk assessment procedures. Specifically, they must consider how fraud could cause a material misstatement in the financial statements, then design further audit procedures based on those risks.
Testing. Auditors test financial transactions and account balances to verify their accuracy and completeness. For example, auditors examine supporting documentation, such as invoices, contracts and bank statements, to ensure that transactions are legitimate and properly recorded. They also confirm accounts receivable and pending litigation and physically observe year-end inventory counts. These procedures help auditors detect anomalies or discrepancies that may indicate fraudulent activity.
Auditors are trained to recognize the warning signs of fraud, including unusual transactions, financial record inconsistencies and deviations from standard procedures. The new standard emphasizes the importance of maintaining professional skepticism throughout the audit and adds specific requirements for responding when fraud or suspected fraud is identified. When auditors identify red flags, they may ask questions and perform additional procedures to evaluate the implications for the financial statements and the audit.
Fraud-reporting programs. If a business has a whistleblower program or another fraud-reporting mechanism, the new standard requires the auditor to understand the program and how management responds to fraud allegations received through it.
In addition, the new standard adds requirements concerning communication with management and those charged with governance about fraud suspicions identified during an audit. It also includes additional requirements for documenting the auditor’s consideration of fraud and the work performed in response to identified or suspected fraud.
Coming Soon
The new ASB guidance reinforces the important role auditors play in addressing fraud risks but doesn’t turn an audit into a fraud investigation or guarantee that fraud will be detected. The auditing standard goes into effect for financial statement periods ending on or after December 15, 2028, with early implementation permitted. Reach out to your Hood & Strong team for more information.
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Sidebar: Audits Are an Effective Antifraud Control Measure
Every two years, the Association of Certified Fraud Examiners (ACFE) publishes a study detailing the costs, schemes, perpetrators and victims of occupational fraud. Occupational Fraud 2026: A Report to the Nations found that audits can be an effective antifraud control.
The study reveals that victim organizations with external audits of their financial statements had 33% lower median fraud losses than those without external audits. External audits were also associated with a 20% shorter median duration of fraud schemes.
Supplementing your annual audit with periodic surprise audits can further reduce fraud risks. According to the ACFE study, organizations that conducted surprise audits had 50% lower median fraud losses than those without this antifraud control in place. Moreover, surprise audits reduced the median duration of fraud schemes by 50%.
Audits can help reduce fraud risks, but audit procedures differ from forensic investigation procedures. If your auditor discovers errors or other suspicious activity during fieldwork, he or she may recommend following up with a forensic accounting investigation.
