The primary responsibility for the prevention and detection of frauds and errors rests on management of the company.
Auditors should assess the risk that fraud/error may cause the financial status to contain material misstatements and should enquire of management as to any fraud or error that has been discovered based on that risk assessment, which will involve consideration of the integrity of the client, unusual pressures on the entity, unusual transactions and problems in obtaining sufficient appropriate evidence, the auditor should design appropriate tests.
Auditors accept representations and documents as genuine unless evidence to the contrary, appears but conduct their work with an attitude of professional scepticism.
An auditor should design audit procedures to obtain reasonable assurance that those frauds and errors, which are material, have not occurred or if they have occurred they have either been corrected or properly disclosed in the financial statements.
Due to the inherent limitations of an auditor, there is an unavoidable risk that some material misstatements will not be detected even though the audit is properly planned and performed. This is because fraudulent conduct is often deliberately concealed and all internal controls and audit procedures are subject to inherent limitations. Any accounting and internal control system has inherent limitations which means that it may be ineffective against frauds such as collusion between employees and management override of controls.
If the auditor detects any fraud regardless of the materiality he has a duty to report this to management.