WHAT IS THE INDEPENDENT AUDITOR'S RESPONSIBILITY FOR THE DETECTION OF FRAUD?

• NCJ Number: 68742
• Journal: Journal of Accountancy Volume: 140 Issue: 5 Dated: (NOVEMBER 1975) Pages: 76-80
• Author(s): D R CARMICHAEL
• Date Published: 1975
• Length: 5 pages
• Publication Format: Article
• Language: English
• Country: United States of America

Annotation

AN AUDIT CANNOT GUARANTEE THE ABSENCE OF FRAUD, BUT IT SHOULD ESTABLISH THAT THE FINANCIAL STATEMENT ARE FREE FROM MISSTATEMENTS CAUSED BY MATERIAL FRAUD.

Abstract

ALTHOUGH THE DETECTION OF FRAUD WAS AN IMPORTANT OBJECTIVE OF EARLY AUDITS, AS BUSINESSES BECAME LARGER AND MORE COMPLEX, THE FOCUS OF AUDITORS SHIFTED TO THE PRESENTATION OF FINANCIAL STATEMENTS IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. INDEPENDENT AUDITORS, HOWEVER, STILL ARE RESPONSIBLE FOR DETECTING FRAUDS THAT WOULD BE UNCOVERED BY STANDARD AUDITING PROCEDURES, BUT ARE NOT CHARGED WITH ACTIVELY SEARCHING FOR THESE IRREGULARITIES. IN AN ORDINARY EXAMINATION, THE AUDITOR EVALUATES THE IMPORTANCE OF ERRORS OR IRREGULARITIES, WEAKNESSES IN THE INTERNAL CONTROL SYSTEM, SUSCEPTIBILITY OF CERTAIN RECORDS TO MISSTATEMENT, AND THE VALIDITY OF DOCUMENTS SUPPLIED BY MANAGEMENT. WHEN AUDITORS SUSPECT THAT FRAUD MIGHT EXIST, THEY SHOULD INFORM THE MANAGEMENT LEVEL THAT APPEARS TO BE AT LEAST ONE LEVEL ABOVE THOSE INVOLVED. SPECIFIC CONDITIONS THAT WOULD ALERT THE AUDITOR TO THE POSSIBILITY OF FRAUD DEPEND ON THE CIRCUMSTANCES. FOR EXAMPLE, SUBSIDIARY LEDGERS THAT DO NOT RECONCILE WITH CONTROL ACCOUNTS MIGHT BE SUSPICIOUS, PARTICULARLY IN COMBINATION WITH WEAKENSSES IN INTERNAL CONTROLS. THE DISCRETIONARY AUTHORITY OF TOP MANAGEMENT TO OVERRIDE INTERNAL CONTROLS SHOULD NOT CAUSE THE AUDITOR TO SUSPECT FRAUD, ALTHOUGH IT AFFECTS THE SELECTION OF AUDITING PROCEDURES TO TEST THE MANAGEMENT'S JUDGMENTS AND ESTIMATES. THE AUDITOR TRADITIONALLY ASSUMES THAT MANAGEMENT IS HONEST, BUT MIGHT SUSPECT DELIBERATE MISREPRESENTATION UNDER SPECIAL CIRCUMSTANCES, SUCH AS A COMPANY THAT IS EXPANDING AT AN EXTREMELY RAPID RATE OR ONE THAT IS CHRONICALLY UNDERSTAFFED. IF AUDITORS BECOME AWARE OF POSSIBLE FRAUD, THEY SHOULD EXTEND THEIR AUDITING PROCEDURES ACCORDINGLY. PRACTICING AUDITORS AND THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS SHOULD GIVE RENEWED ATTENTION TO IDENTIFYING SPECIFIC MATTERS, OR RED FLAGS, THAT WOULD AFFECT AN AUDITOR'S APPROACH IN AN EXAMINATION, 40 RECOGNIZING COMMON METHODS OF FRAUD, AND TO KNOWING UNIQUE ASPECTS OF PARTICULAR BUSINESSES THAT REQUIRE SPECIAL AUDITING PROCEDURES.