Question

Discuss the professional responsibilities of auditors in detecting fraud. What sort of impact can an audit have on an organization? Describe and note the benefits of an audit. Does an audit increase the perception of detection? Discuss also the limits of audits. Discuss auditor’s need for professional skepticism.

Answer 1

Discuss the professional responsibilities of auditors in detecting fraud. What sort of impact can an audit have on an organization?

The auditor has no responsibility towards "detecting" fraud. The purpose of the audit is to determine whether the AFS present fairly in all material aspects of the financial position and performance of the business. Keeping this in mind, the responsibility which falls onto the auditor is to reduce the risk of fraud in the AFS to an acceptably low level, meaning the auditor needs to consider the risk of material misstatement in the AFS due to fraud when planning and performing the audit. Where there is a high risk of fraud, the audit procedures carried out should be extensive in order to reduce the risk. As long as the auditor complies to the International Standards on Auditing and performs his/her work with due diligence and independence, the auditors responsibilities are satisfied.

Describe and note the benefits of an audit

The annual auditing of financial statements produces a series of notable advantages:

• An audit helps to identify weaknesses in the accounting systems and enables us to provide suggestions for improvements
• An audit assures directors, who are not involved in the accounting functions on a day-to-day basis, that the business is running in accordance with the information they are receiving. An audit also helps reduce the risk of fraud and poor accounting.
• An audit facilitates the provision of advice that can have real financial benefits for a business, including how the business is running, what margins can be expected, and how these can be achieved. Advice can cover anything from the tightening of internal controls, to tax planning or reducing the risk of fraud.
• An audit will enhance the credibility and reliability of the figures being submitted to prospective investors. If an owner is planning on attracting investment or selling shares in the next three years, carrying out regular audits is highly beneficial.

An audit adds credibility to published information for employees, customers, suppliers, investors and tax authorities:

• Credit ratings may be affected by not having an audit. Suppliers may not be prepared to give appropriate credit limits. Banks and trade suppliers rely in part on credit rating agencies’ assessment of the company, and will look more favourably on companies that have an audit.
• In the event of insurance claims, loss adjusters often have more faith in audited accounts.
• An audit provides assurance to shareholders (if they are not directors closely involved in the business) that the figures in the accounts show a true and fair view.

​Does an audit increase the perception of detection?

Preventing fraud is generally less costly than trying to recover losses. One inexpensive, yet effective, fraud prevention measure is to increase the perception of detection. For example, internal controls are most effective at preventing fraud when they are known by those who may be tempted to steal from a public entity. This means being open about the fact that the entity is taking steps to prevent and detect fraud.

Discuss also the limits of audits

The most important limitations of auditing are discussed below;-

1. FRAUDS BY MANAGEMENT: Auditing fails to verify planned frauds. The management can settle thickly to operate the accounts in order to cover up their inefficiencies. The frauds committed in such circumstances are not revealed. The audited accounts could not show the true and fair outlook.
2. WRONG CERTIFICATES: Auditing is based on many certificates taken from management and other persons. The certificates may not provide the true information. Auditing may fail to provide the desired results Auditing. When certificates provide wrong information, the financial statements cannot show correct position.
3. MISLEADING CLARIFICATION: Auditing fails to disclose correct information. The background of entries may not be clear to audit staff. The management may not provide correct clarification. The auditor is bound to present his report even of the clarification is not true. The auditing fails to help many persons who rely on the audit report.
4. NO TRUE PICTURE: The auditing does not present cent percent true picture. The auditor is concerned with figures shown in the books of accounts, Auditing fails to disclose true picture when figures have been manipulated. The purpose of audit fails when it is unable to depict a real scene of business affairs.
5. NO CORRECT VIEW: Auditing fails to present correct view. There are limitations of accounting so figures are not facts. These figures are based on opinion. Moreover, the auditor has to make judgments on various matters. The personal judgments may be wrong in certain cases. Thus auditing is unable to disclose correct view.
6. NO SUGGESTION: The audit is conducted to show a fair view of financial statements. Auditing is not concerned with management policies. The auditor cannot guide management for better use of capital. The auditor examines what has been done. He is unable to suggest what should have been done.
7. ABSENCE OF HONESTY: The auditing work depends upon various professional and personal qualities of an auditor. Honesty and independence are highly essential traits. The auditor must certify which is true. Management and other parties should not influence him. The absence of honesty and independence means failure of audit purpose.
8. BIAS OF AUDITOR: The auditing fails to present fair examination due to the bias of an auditor. It is the superiority of an auditor that he should be independent. The attitude of an auditor is included in audit work when such quality is missing. The biased auditing fails to help many people.
9. HIGH COST: The audit work is completed with cost. ‘The cost of an audit should not exceed the cost of errors and frauds, The small-scale business enterprises consider it as a burden on their performance. Auditing fails to serve millions of business entities.

Discuss auditor’s need for professional skepticism.

​Essentially, ISA 200 requires the use of professional scepticism as a means of enhancing the auditor’s ability to identify risks of material misstatement and to respond to the risks identified. Professional scepticism is closely related to fundamental ethical considerations of auditor objectivity and independence. Professional scepticism is also linked to the application of professional judgment by the auditor. An audit performed without an attitude of professional scepticism is not likely to be a high quality audit. At its core the application of professional scepticism should help to ensure that the auditor does not neglect unusual circumstances, oversimplify the results from audit procedures or adopt inappropriate assumptions when determining the audit response required to address identified risks, all of which should improve audit quality.