Why Are They Always Asking About Fraud?

Randy Feld

Ever wonder why your auditors are asking for seemingly insignificant items or for detail on an insignificant financial line item?  It is because the auditors are required to follow specific auditing standards that have been set forth in order to protect the companies and parties that have a vested interest in the financial statements.  One of these Statements on Auditing Standards (SAS) is specifically designed to help improve the likelihood that if business fraud exists within a company that it is detected during an audit.  The standards require the auditors to assess risk related to fraudulent activity and where it could result in a material misstatement in the financial statements.

As a whole, an audit conducted under Generally Accepted Auditing Standards (GAAS) is not designed to detect fraud but to provide reasonable assurance that the financial statements are presented fairly, in all material respects, in conformity with Generally Accepted Accounting Principles (GAAP).  The standards are intended to provide auditors with standard procedures to help detect misstatements relating to fraudulent activity.

This is why the auditors will ask for details on items that may seem insignificant.  Some procedures the auditors are required to perform include:
  • engagement team planning meeting to assess risk of fraud and brainstorm how fraud might be committed
  • assess internal controls and segregation of duties
  • assess individuals’ opportunity, pressure, and attitudes towards fraudulent activity
  • adjustments to audit procedures due to a lack of controls within the company or organization
  • maintain a level of unpredictability
  • address the risk of management override by reviewing journal entries for the audit period being covered
  • inquire of management, governance and employees of any fraudulent activity

Audit standards specifically state that the risk of material misstatement due to fraud is something that should be considered throughout the audit engagement and when additional risk is identified, the audit engagement team is required to address the risk and extend their audit procedures if necessary.

Overall, auditors are conducting their procedures in the best interest of their clients and those with a vested interest in the financial statements to insure that the numbers are fairly stated.  While it may seem that fraud will never happen to you or your company, the fact of the matter is it does happen and as auditors we want to do our best to help prevent and detect it whenever possible.


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