Audit Procedures for Detecting Fraud
Discuss about the Responsibility for Detecting Fraud.
Audit of the financial statements has become one of the indispensable activity as this is the one which gives reasonable assurance to the users of the financial statements that it has been prepared on unbiased basis and is giving a true picture of the management and its accounts. While conducting or starting the audit, auditor needs to know the business and its environment, the control procedures being established within the organization, the industry in which it deals and several other in and outs regarding the company. For the audit to be effective, the auditor needs to know and validate the estimates and judgements being taken into consideration by the management as it has a huge bearing on the results of the organization.Audit is conducted with the view to identify the material misstatements, if any in the accounts prepared by identifying the risk areas. In the course of the audit, the auditor also needs to check the materiality, the consistency and the going concern assumption of the entity. He may use various procedures in path to checking of the books which includes substantive and analytical audit procedures. Substantive audit procedures generally include vouching of the incomes and expenses recorded in the profit and loss account using tools like inspection of the journal, ledgers, invoices, bills, contracts, etc and observations of the activities like physical verification going on in the organization. This also includes inquiry in the account balances and taking external confirmation from the parties like banks, financial institutions and creditors. The main focus here is to ensure that proper disclosures are made for related party disclosures, if any. Besides this, auditor also does recalculation and reperformance of some of the activities like valuation of the inventory, actuarial valuation in acse of employee benefits to ensure whether proper valuation techniques have been applied and the results don’t vary much. One common example of substantive procedure is the preparation of the bank reconciliation statement at the ned of every period to ensure that the bank and the cash books of the company are reconciling(Bae 2017).
In case the auditor is not able to make out the opinion on the financial statements post the application of substantive procedures he would apply analysitical procedures which includes comparison of the actual results of business from the expected or budgeted results, analysis of key financial ratios, trend analysis, comparison with industry data and other non financial data points. The auditor also needs to check on the SOX compliance being maintained in the entity, the governance, etc. and based on all this he determoined the threshold limit for audit materiality. The results of all these procedures and the level of internal control being practiced in the organization (strong or weak), the auditors prepares the audit plan and determines the nature of sampling to be doen, the amount of time to be given in checking of the critical areas and the extent to which a particular thing can be checked(DeZoort & Harrison 2016).
In the given case, Double Ink Printers Limited is the subject client and Stewart and Kathy would be conducting the audit. They would need to check the opening balance as mentioned in the ACCA guidelines as they are taking over from the old auditors Jay and associates. The analytical procedures become all the more important in this case as the management has gone huge changes in its structure, besides that the new IT system has been introduced in the company without proper testing and cross checking. It has also been noted that there is inconsistency in the adoption of policies by the company w.r.t. inventory valuation and depreciation accounting which shows non complainace with the auditing standards. In the presence of all the above stated factors, an analysis has been made using key financial ratios to arrive at some conclusion. Since industry data is not available, we have ignored the same. Below are the results.
|
s.no |
Issue Involved |
Type of risk |
Reason of risk |
Mitigation of risk |
|
1 |
The first case is where the management of the company, indulges in certain activities that are different from the routine nature of work. |
It is type of inherent risk that is associated with changes in the overall procedures of an organisation. |
The life of the asset as per the industrial regulation is 30 years, but the company must to consider the life as 20 years. The management is not taking the decision based on any research that has been conducted by the management, but based on its own knowledge. The main risk factor is that there might be over valuation or the undervaluation of the assets that might affect the overall functioning of the company. Thus, it is important that proper research must be done before undertaking such assumptions(Knechel & Salterio 2016) |
The auditor can mitigate the risk, by asking the management to undertake proper research before making such changes. It is important proper disclosures regarding all the major changes are properly given by the auditor so that the financial statements show the true state pouf affairs of the company(Fay & Negangard 2017). |
|
2 |
The second issue is associated with the launching of the new IT system. |
It is type of risk that is associated with change in the current procedures without undertaking proper research. |
The system is entirely new, the amazement is not familiar with the kind of value it will generate. There are high chances that since the management have not done roper reconciliation and have not adopted proper measures to make sure that the system is functioning properly. It exposes the company to the element of inherent risk. Thus, it is important that before taking steps, proper precautions must be undertaken so that the company can avoid kind of material misstatement. The auditor must also checks the records properly and asks the management to provide him with proper details. All the elements of risk must be properly identified and eliminated by the company(Raiborn, Butler & Martin 2016) |
The auditor can mitigate the risk by asking the man agent to provide with all the valid details regarding the new system and also thy must undertake proper research before undertaking so. These are the few areas where there is presence of inherent risk in the overall functioning of the company. These occur even in the presence of proper control factors, but the management should try to make the control more strong so that all such risk can be reduced(Sonu, Ahn & Choi 2017). |
|
s.no |
Issue |
Reasons of fraud risk |
Mitigation of fraud |
|
1 |
In the given case of DIPL, the two major fraud risk areas are, one there is no proper segregation of work in the company. All the major departments are being handled by single person. There are high chances that in cases, the employees indulge in any recalculation, the management might not be able to identify the same |
The main reason of risk is that in case of DIPL, there is no proper segregation of work. The account receivable department is handled by a single clerk, who does all the work of making the invoices, deciding the pricing, verifying the transaction and making the payment. The cash collection is also handled by a single clerk who downloads the e receipts, verifies the accounts, updates the books and reconciles them. Thus there is an issue of no segregation of important work between the employees and hence it would be very difficult for the management to ascertain proper authority in case there is failure on part of the employees.(Grenier 2017) |
The management can mitigate the fraud by taking important steps of segregation of work, and asserting that proper controls are there. The auditor can ask the management to do surprise checks and verify the accounts regularly so that the employees cannot indulge in any kind of fraud. This is very important that proper authority is established by the management so that work is properly dividend and check points must be there to ascertain their overall validity. |
|
2 |
The second type of issue is in the installation of the major IT system by the management without any proper research. |
The main reason is that there are high chances that the management has installed the new system in so much haste because there was some personal motive involved of the management. The new system was installed without any reconciliation, any research, it might affect the overall profitability of the company hampering its growth and development. There might be undervaluation or overvaluation of the new system which might have risk of material misstatement on the books of the company (Jones 2017). |
It is important that the auditor takes important steps to mitigate the overall risk of the company. The auditor should ask the management to present them with important documents regarding the company, to make take expert opinion before installing the new system. It should also reconcile the overall cost and profit to see the profitability of the system and should also check its effect on the financials of the company. The management should provide the auditor with all the support and documents. In case the auditor finds any discrepancies, he can modify the audit report and give a disclaimer opinion. These are the few ways in which the auditor can mitigate the overall risk of fraud that is associated with the company. |
References
Bae, SH 2017, 'The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From Korea', Journal of Applied Business Research, vol 33, no. 1, pp. 153-172.
DeZoort, FT & Harrison, PD 2016, 'Understanding Auditors sense of Responsibility for detecting fraud within organization', Journal of Business Ethics, pp. 1-18.
Fay, R & Negangard, EM 2017, 'Manual journal entry testing : Data analytics and the risk of fraud', Journal of Accounting Education, vol 38, pp. 37-49.
Grenier, J 2017, 'Encouraging Professional Skepticism in the Industry Specialization Era', Journal of Business Ethics, vol 142, no. 2, pp. 241-256.
Jones, P 2017, Statistical Sampling and Risk Analysis in Auditing, Routledge, NY.
Knechel, WB & Salterio, SE 2016, Auditing:Assurance and Risk, 4th edn, Routledge, New York.
Raiborn, C, Butler, JB & Martin, K 2016, 'The internal audit function: A prerequisite for Good Governance', Journal of Corporate Accounting and Finance, vol 28, no. 2, pp. 10-21.
Sonu, CH, Ahn, H & Choi, A 2017, 'Audit fee pressure and audit risk: evidence from the financial crisis of 2008', Asia-Pacific Journal of Accounting & Economics , vol 24, no. 1-2, pp. 127-144.
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