Question

"Audit Risk and Fraud" Please respond to the following:

Create a scenario in which a company conceals financial fraud from the auditing firm through the use of information technology. Next, suggest at least one (1) way in which an auditing firm can minimize its exposure to this risk.

planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan in an attempt to reduce audit risk to an acceptable level. Select a balance sheet account or income statement account, and discuss the type of audit procedure that would produce the most reliable evidence for that account balance. Defend your position.

Answer 1

Various Financial Frauds have occured during the past decades which Audit Firms were not able to detect. It is due to careful planning, window dressing and use of Information Technology that these could happen.

Example: Suppose a IT company which offers Software Solutions to various companies at local and global level. It creates Bogus Sales entries and passes entries for Debtors in such a way that none of the Debtors continue.

For e.g.

Bogus Sale Entry: I Year

Paul A/c xx

To Sale A/c xx

Bogus Debtor Entry: II year

Shaun A/c xx

To Paul A/c xx

This way it can create fake revenue and keep revolving Debtors without coming into the eye of Auditors or any authority.

Auditor's Steps in such situation.

a. Direct Positive Debtor Confirmation.

b. Strict Ledger Scrutiny for Revenue Accounts.

Planning an audit involves establishing the overall audit strategy for the engagement and developing an audit plan in an attempt to reduce audit risk to an acceptable level.

Selection of balance sheet account: Bank Balance.

The Audit Procedures which will produce most reliable Audit Evidence would be:

a. Obtain Bank Confirmation for the Bank Balances directly in the name of Auditors.

b. Verify Bank Reconciliation prepared by the Accounts department.

c. Vouch for the transactions.

d. Perform Ledger Scrutiny of the Bank Accounts in the Ledger Books.