How should auditors respond when significant fraud risks are identified during an audit?

When significant fraud risks are identified during an audit, it is crucial for auditors to take a proactive approach to address those risks. Designing procedures to provide reasonable assurance of detecting the fraud is essential because it directly aligns with the auditors' responsibilities to safeguard the integrity of the financial statements and to protect the interests of stakeholders.

This response involves tailoring audit procedures to focus on the specific areas where fraud risk has been identified, which might include enhanced testing, focused inquiries, or the application of fraud detection tools. By doing so, auditors can increase the likelihood of identifying any fraudulent activities and mitigating the associated risks effectively.

In contrast, overlooking the risks would be irresponsible and could lead to unaddressed vulnerabilities within the organization. Increasing the sample size of transactions audited may also help to some extent, but simply increasing sample size does not directly address the nature of the fraud risks. Reporting the risks to the media does not serve the auditing function and could compromise professional ethics and confidentiality. Thus, proactive design of audit procedures is the most appropriate and effective response to significant fraud risks.