Question

What is the current authoritative guidelines for fraud detection in an audit?

During which phase of the audit should the auditor consider fraud? Explain.

Name two risk factors related to fraud. For each risk factor list 2 or more schemes that the auditor should look for.

How does the risk assessment of fraud affect the audit?

If the auditor detects a misstatement due to fraud, what is the appropriate response?

Answer 1

• The current authoritative guidelines for fraud detection are presented in Statement on Auditing Standards(SAS)No.99, Consideration of Fraud in a Financial Statement Audit. The objective of SAS 99is to seamlessly blend the auditor's considerationof fraud into all phases of the audit process.In addition ,SAS 99 requires the auditor to perform new steps such as a brainstorming during audit planning to assess the potential risk of material misstatement of the financial statements from fraud schemes.
• An auditor is required to consider the potential for audit fraud, in accordance with the respective auditing standards of different countries around the world.

  When the auditor is considering the potential for fraud in an audit, they will focus on risk assessment procedures in the planning stage. Remember that auditors must maintain an attitude of professional skepticism. One of the auditor’s responsibilities includes asking management and the audit committee if they know of any unusual situation or any employee who is acting strangely, because the prevention and detection of fraud is ultimately their responsibility.

  Fraud isn’t just about catching unusual transactions and relationships in the numbers in the books but also about examining the general behavioral patterns of employees and any hardships, financial or otherwise, that they may be suffering at the time.

  An auditor’s action in response to potential fraud can be divided into an overall (i.e., financial statement level) and then a more specific (specific line item/assertion level) response.

  In dealing with significant fraud risks at the overall level, the accounting firm will assign more experienced audit staff to the engagement and increase the level of supervision of lower level staff. The auditor will also thoroughly consider the client’s accounting choices and policies to determine acceptability. Finally, auditors may choose to implement unpredictable, surprise procedures to verify the values on the financial statements – such as unexpectedly showing up at the client’s inventory count unannounced.

  On a more specific level, auditors will make an effort to gain more reliable evidence by relying more on documentary evidence as opposed to oral or visual evidence. In addition, they may also try to obtain more evidence from third parties instead of just from the client. They may also change the extent of their procedures by increasing their sample size to substantiate values, as well as by performing procedures closer to year end.

• 1st factor-Detection Risk:

  Detection Risk is the risk that the auditors fail to detect a material misstatement in the financial statements.

  An auditor must apply audit procedures to detect material misstatements in the financial statements whether due to fraud or error. Misapplication or omission of critical audit procedures may result in a material misstatement remaining undetected by the auditor. Some detection risk is always present due to the inherent limitations of the audit such as the use of sampling for the selection of transactions.

  2nd factor-Inherent Risk:

  Inherent Risk is the risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls (factors that may cause a misstatement due to absence or lapse of controls are considered separately in the assessment of control risk).

  Inherent risk is generally considered to be higher where a high degree of judgment and estimation is involved or where transactions of the entity are highly complex.

• The risk assessment of fraud-1. Auditor to inquire the management, internal audit team and those charged with governance whether any instance of actual or alleged fraud has occurred in the past and obtain their respective views on the risk of fraud.

  2. Consider whether any other information obtained indicates the risk of fraud.

  3. Evaluate any fraud risk factors are present form the information obtained from the assessment.

  4. Identify Unusual or unexpected relationship while performing analytical procedure and evaluate them to assess the risk of material misstatement due to fraud

  5. Presume that there will be risks in revenue recognition based on that evaluate transactions

• If the auditor detects a misstatement due to fraud,

  Guidance in SASs nos. 82 and 53 on the auditors response to a detected fraud is very similar. If the misstatement resulting from fraud is not material to the financial statements, the auditor should refer the matter to an appropriate level of management at least one level above those involved and be sure the audit implications have been adequately considered. For fraud resulting in a material effect on the financial statements, or if the auditor is unable to determine the size of the misstatement, the auditor should take the actions identified above. In addition, the auditor should attempt to determine whether material fraud exists and, if so, its effect and, when appropriate, suggest that the client consult with legal counsel.