What should auditors do if they encounter a significant fraud risk?

When auditors encounter a significant fraud risk, the best course of action is to report it to management and adjust the audit plan accordingly. This approach aligns with the fundamental responsibilities of auditors to safeguard the integrity of financial reporting and ensure compliance with applicable regulations.

By identifying and addressing significant fraud risks proactively, auditors are able to adjust their audit procedures to obtain sufficient appropriate evidence regarding the risk. This may involve implementing additional testing, changing timelines, or reallocating resources to ensure that the risk is adequately considered in their work. Reporting findings to management also helps communicate the seriousness of the risk and allows management to take necessary corrective actions, reinforcing a culture of transparency and accountability within the organization.

This process not only enhances the effectiveness of the audit but also aids in the overall risk management of the entity, demonstrating the auditor's commitment to their role in promoting ethical standards and preventing potential financial misstatements.