With fraud and financial misconduct continuing to make global headlines, expectations for auditors are rising. To address these evolving risks, the International Auditing and Assurance Standards Board (IAASB) has released ISA 240 (Revised), The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements, a sweeping update that reinforces the auditor’s role in fraud detection and strengthens the profession’s response to misconduct risk.
The revised standard takes effect for audits of financial statements for periods beginning on or after December 15, 2026, aligning with ISA 570 (Revised 2024), Going Concern, and other related amendments that collectively aim to enhance transparency and resilience across financial reporting.
Why the update matters
ISA 240 (Revised) marks a fundamental shift toward a more proactive, data-driven, and skeptical approach to fraud risk. The IAASB’s revision follows extensive consultation with global regulators, investors, and audit practitioners to deliver clearer responsibilities, stronger risk response, and greater transparency.
For firms, this means preparing now to ensure audit methodologies, training, and technology align with the new expectations.
See how an AI-powered platform supports a fraud-focused audit approach with full-population testing and explainable results in our Audit & Assurance solutions.
What’s changing under ISA 240 (Revised)
The IAASB’s revisions focus on five key areas that auditors need to understand and plan for:
1. Clearer responsibilities for auditors
Auditors’ duties in identifying and responding to fraud risks are now placed before those of management or those charged with governance (TCWG).
This structural change reinforces the auditor’s active role in fraud prevention and clarifies that professional skepticism and judgment must remain central throughout the engagement.
To reduce misinterpretation, the inherent limitations of an audit are now presented separately—avoiding any suggestion that auditors are less accountable for fraud detection.
2. A renewed emphasis on professional skepticism
The IAASB has made professional skepticism the backbone of ISA 240 (Revised). Auditors are expected to:
- Remain alert to potential bias when gathering or interpreting evidence
- Challenge assumptions and inconsistencies in management’s explanations
- Use technology and data analytics to expand fraud detection capabilities
Notably, the previous allowance to “accept records as genuine unless reason to believe otherwise” has been removed—signaling that a more critical mindset is required.
Practical example: use continuous analytics to surface unusual postings before year-end with MindBridge’s AI-powered Manual Journal Entries use case
3. Applying a fraud lens to risk assessment
ISA 240 (Revised) strengthens requirements for identifying and assessing the risks of material misstatement (ROMM) due to fraud.
Key enhancements include:
- Aligning with ISA 315 (Revised 2019) to integrate a fraud perspective into the broader risk assessment process
- Reaffirming the presumption of fraud risk in revenue recognition (now more difficult to rebut)
- Requiring auditors to understand the entity’s whistleblower program and fraud reporting processes
- Expanding examples of fraud risk factors to support more consistent identification and response
These updates emphasize that fraud risk cannot be treated as an isolated step—it must be embedded throughout the audit approach.
4. Stronger communication and transparency
The revised standard enhances communication expectations across every stage of the audit:
- Continuous dialogue with management and TCWG about fraud-related findings, not just at audit completion
- Clearer guidance for reporting fraud as a potential instance of non-compliance with laws and regulations (NOCLAR)
- New emphasis on including significant fraud-related matters as Key Audit Matters (KAMs) for public entities
These updates not only raise the bar for audit quality but also improve public trust in financial reporting.
5. The “stand-back” evaluation
Before concluding the engagement, auditors are now required to perform a stand-back assessment—a holistic evaluation of whether their fraud risk assessments and audit responses remain appropriate.
This ensures the audit file reflects a comprehensive view of fraud risks and responses, rather than fragmented or reactive judgments.
Scalability and proportionality
Recognizing that not all firms have the same resources, ISA 240 (Revised) introduces new scalability guidance for small and mid-sized practices (SMPs).
This includes illustrative examples and documentation guidance to help firms apply the standard proportionately while still meeting its intent and rigor.
How ISA 240 (Revised) connects to ISA 570 (Revised 2024)
Fraud and financial distress often occur in tandem, which is why the IAASB has deliberately aligned ISA 240 (Revised) with ISA 570 (Revised 2024), Going Concern.
Together, these standards emphasize early detection of red flags and reinforce the auditor’s responsibility to evaluate whether management’s assessments of going concern are reasonable and transparent.
Preparing for implementation
While the standard is not effective until late 2026, firms should begin implementation planning now, including:
- Updating audit methodologies and templates to reflect the new fraud lens
- Enhancing training programs around professional skepticism and data analytics
- Evaluating technology and tools that enable full-population testing and anomaly detection
- Build an always-on alerting layer across engagements with Continuous Monitoring.
- Communicating with clients about how these changes will impact engagement planning and reporting
Firms that modernize their approach early will be best positioned to demonstrate audit quality and compliance when the standard becomes effective.
How MindBridge can help firms stay ahead
Modern audit analytics platforms like MindBridge can play a critical role in supporting ISA 240 (Revised) compliance.
By leveraging AI and machine learning, MindBridge helps auditors:
- Analyze 100% of transactions rather than relying on samples
- Detect unusual entries, anomalies, and patterns of potential fraud
- Strengthen risk assessment through explainable AI insights
- Enhance documentation and audit trail for transparency and review
With these capabilities, firms can meet the new expectations of ISA 240 (Revised) while improving efficiency, quality, and confidence in their audits.
The Path Forward: Preparing for ISA 240 (Revised)
ISA 240 (Revised) represents a clear evolution in audit standards—one that aligns with the realities of modern fraud risk and the need for data-driven assurance.
By adopting AI-enabled tools and embedding a fraud mindset across the engagement, firms can turn regulatory change into an opportunity to lead with integrity and foresight.
Join our upcoming webinar
📅 Fraud Detection – Surfacing Red Flags Before They Become Headlines
🕐 Thursday, October 30, 2025 | 1:00 PM – 1:30 PM EDT
Speaker: Michael Bottala, Director, Presales & Solutions Engineering, MindBridge
Discover how AI-powered analytics can help your firm detect fraud risks earlier, strengthen audit testing, and enhance compliance with evolving standards, such as ISA 240 (Revised).
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