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Research Paper Topic:
What are Auditors' Responsibility Today to Detect Fraud; include how do these responsibilities fit into the professional practices of: external auditors, Certified Public Accountants in public practice and Internal Auditors and what has changed in these areas in recent years?
For standards or articles use the following items as they relate to your paper to help organize your paper. Statements on Auditing Standards (SAS), especially all those statements relating to fraud, Financial Accounting Standards Board (FASB), International Financial Reporting Standards (IFRS), Sarbanes-Oxley Act , etc. (SOX, Sarbox); International Standards for the Professional Practice of Internal Auditing (Standards), European Confederation of Institutes of Internal Auditing (ECIIA), Committee of Sponsoring Organizations of the Treadway Commission (COSO) , Public Company Accounting Oversight Board (PCAOB)and its standards, and professional articles or books as primary sourc
Auditors' Responsibility to detect Fraud today
Public companies are required by the SEC to prepare and issue financial statements that made a fair presentation of the companies' performance. The SEC also stipulates that the companies whose shares are publicly traded must complete an audit done by an independent auditor. The audit process involves an examination to whether or not the financial statements and accompanying notes present fairly stated the company's financial position in accordance with generally accepted accounting principles. Once the audit is completed, the auditor concludes that the overall financial statement is not material misstatement, and then the audit report can be issued. On January 22, 2007, the PCAOB issued a report called Observations on Auditors' Implementation of PCAOB Standards Relating to Auditors' Responsibilities with Respect to Fraud (PCAOB Release No. 2007-001). In this report, it highlighted the auditor's responsibility in five sections:
- Auditor's overall approach to the detection of financial fraud
- Required brainstorming sessions and fraud- related inquires
- Auditor's response to fraud risk factors
- Financial statement misstatements; and
- Fraud associated with management override of controls.
Fraud continues to be one of the biggest challenges face the accounting profession, specifically the internal and external auditors. The auditor's main concern is to ensure that the financial statements of a company be stated fairly without material misstatements. While it is a fact that the auditors cannot evaluate every single transaction of a company, it is imperative that they have to rely on good judgment, risk assessment and analytical procedures. The purpose of this paper is to research the auditors' responsibility to detect fraud in today's environment.
Control and Analytical Risk Assessment
The purpose of an internal control evaluation is to determine the level of control and analytical risk. Control risk is the risk that the accounting system of controls may fail to prevent or not being to detect a material misstatement (Peter 2009). The company's risk assessment is the foundation for selecting the test of control or tests of the effectiveness of the system. Once the control risk assessment has been approved, and the test of control developed, the analytic risk is made based on prior decisions about internal control. Analytic risk assessment is the risk that analytical procedures performed during the audit (including the tests of internal control) will fail to detect a material misstatement (Peter 2009). According to The IIA's International Standards for the Professional Practice of Internal Auditing, the internal audit function must communicate the finding about the effectiveness of the risk management and control processes to senior management and the audit committee (Peter 2009). The key role of risk assessment is to identify threats to the organization's mission and to identify how to mitigate those risks. By implementing risk analysis and risk assessment, an organization has the power to make better business decisions (Peter, 2009).
New era in auditors' requirements
SAS no.99 is an auditing statement issued by the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) in October 2002.
SAS 99 defines fraud as an: Intentional act that results in a material misstatement in financial statements. There are two types of fraud for an auditor needs to consider: The first one is material misstatements that arise from fraudulent financial reporting as an example false accounting records. The second type of fraud is occurs when misstatements arising from misappropriation of assets (theft of assets or fraudulent expenditures). According this article, SAS 99 Consideration of Fraud in a Financial Statement Audit SAS 99 does not change the overall responsibility of an auditor for detecting fraud, but there were some significant changes to what auditors are required to fulfill the responsibilities (Maddox, 2004). According to the article, Auditors' Responsibility for Fraud Detection "brainstorming" is new concept that auditors will have to keep in mind when implementing the audit procedure. The two type of brainstorming discusses in the paragraph were strategic in nature means the audit team should possess good knowledge regarding the firm or client and understand how fraud can occur. The second type is to set the proper "Tone at the top" provide a degree of professional skepticism. In addition to brainstorming, SAS no.99 also does require the audit team to communication among them during the engagement for any potential material misstatements they have encountered during the process The main goal of brainstorming is gather ideas of how fraud might occur in a company, so structuring the audit session that is simple to follow (Ramos, 2003).
o Split it into two parts.
o Determine a reasonable time limit
o Consider assignment "homework"
Escaping Detection: Why Auditors do not find Fraud
Despite all the publicity surrounding the issue of financial fraud in the last decade, most auditors, whether internal or external, are having much difficulties identifying fraud. In the past, financial statement audits were never designed to detect fraud. As an example, many young auditors don't know what questions to ask when conducting an audit, and sometimes very reluctant to approach top management with their concerns. Some auditors just have lack of understanding of fraud schemes how they are carried. The importance of finding fraud during an audit is very important; not only the auditors, but also for investors and other professionals who use financial statements to make investment decisions. (Cohen, 2010)
Changing role of the auditors
In this new era of globalization, the pressures and challenges encountered by an auditor are so strong that they should be willing to accept them in order to maintain trust and integrity. This article 'the changing role of the auditors' discusses the role and responsibility of internal auditors in the detection and prevention of fraud. The internal auditors are in a better position to detect fraud than the external auditors. During the past decades, the internal auditor's role has increased substantially due to the increased demand for this within many corporations. Because internal auditors spend all of their time with one company, they develop much greater knowledge about the company's operations and internal controls than external auditors. They should also be able to recognize the fraud risks that might exit. The internal auditors do provide assistance to external auditors in the implementation of Statement on Auditing Standards (SAS) No. 82. Under SAS No. 82, the auditor has the responsibility to plan and perform an audit to obtain "reasonable assurance" about whether or not financial statements are free of material misstatement. (El Seetharama, 2005)
CPA's responsibilities toward fraud
CPAs should remain constantly vigilant, looking for ways to detect potential fraud. This article Practical and Ethical Considerations in Fraud Examination discussed on what CPAs can do when they uncover fraud during an audit. Knowing the approach, the CPAs should take when uncover fraud is critical step when investigating fraud. For example, while conducting a routine audit, an auditor discovered the client was engaging in an illegal act. Many of these issues involve the evidence-gathering process, and how can auditor discuss the findings to the clients? Fraud is a sensitive subject so it is very crucial for the auditor to ask the right questions to the "Top Management".
Potential questions to the CEO
- As you probably are aware, CPAs today are required to assess the risk of material fraud in the audit of every company
- Sometimes top executives commit fraud because of their personal financial difficulties. Are you currently in good shape, financially?
- Sometimes CFOs commit fraud without the knowledge of the CEO. Do you have the reason to suspect the chief financial officer has committed fraud against the company?
Potential questions to the CFO
o Of the accounts on the company's books, which are the most vulnerable to fraud, and why
o Has the CEO or anyone else in the company asked you to do something you thought was illegal or unethical?
Auditors should never be reluctant to ask questions about fraud regardless of a person position in the organization after all, it's part of the auditor job (Wells, J. (2009).
The "Why" of Change
As the economy works through many challenges, there will be a great need for CPAs to help address, manage and solve the financial outcomes. In the past, accounting, and audit were the basis descriptions of the profession, but now CPAs find challenges in fraud investigation, financial planning, and computer technology. As many businesses shifted and changed dramatically, CPA is required to learn new skills to explore fraud and investigate as well. In order to grasp the reason for this change in a better manner, let us look at the traditional roles CPAs have played in the past. CPAs, as the professionals are people who analyze, interpret, and communicate financial information. The financial crises in today's market have highlighted the need for fraud investigators. Following the Sarbanes-Oxley Act, there has been an increased demand for financial fraud by public accounting firms, and corporations. Public firms are required to incorporate fraud prevention as part of the control environment. AICPA's certified in financial forensics (CFF) credential is granted exclusively to CPAs who specializes in fraud detection and prosecution hold the certified fraud examiner (CFE) credential, which is offered by the Association of Certified Fraud Examiners. (Kruglinski, J., 2009).
CONCLUSION
The AICPA's Auditing Standards Board issued Statement on Auditing Standards No. 99, titled Consideration of Fraud in a Financial Statement Audit. The new standard does not mandate that all auditors become forensic auditors, but it does require that the audit approach now include an increased emphasis on identifying financial statement fraud. A description of SAS No. 99 is presented with comments on the difficulties and expected problems of applying it to private company audits. SAS No. 99 describes the background information on three conditions that typically allow fraud to occur: incentive/pressure, opportunity, and attitude. The standard identifies specific procedures to help the auditor evaluate the potential for fraudulent financial reporting. The nature, timing and extent of audit procedures may have to change based on the results of a risk assessment performed within the context of this standard. As the economy works through its challenges, there will be a need for CPAs to help address, manage, and solve the financial outcomes. Long past are the days when accounting, audit, and tax were the basic description of the profession. Today's CPAs can also find challenges in fraud investigation, financial planning, and computer technology, to name just a few of the expanding areas.
EXECUTIVE SUMMARY
Auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. As defined by the PCAOB, reasonable assurance means that there is a remote likelihood that material misstatement will not be prevented or detected on a timely basis by internal control. The internal audit function plays a major role in evaluating the effectiveness of and recommendation of improvement. According to the article, 'Auditors' Responsibility for Fraud Detection', "brainstorming" is a new concept that auditors will have to keep in mind when implementing the audit procedure. The two types of brainstorming discusses in the paragraph were strategic in nature: means the audit team should possess good knowledge regarding the firm or client and understand how fraud can occur. The second type is to set the proper "Tone at the top" providing a degree of professional skepticism. In addition to brainstorming, SAS no.99 also does require the audit team to communication among them during the engagement for any potential material misstatements they have encountered during the process. The main goal of brainstorming is to gather ideas of how fraud might occur in a company, so structuring the audit session that is simple to follow. Knowing the right questions to ask the "Top management" will enable the auditors to detect any areas that fraud may exist.