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Introduction to the principles and concepts of the audit as an attestation service offered by the accounting profession. Primary emphasis is placed on Generally Accepted Auditing Standards, the role of the CPA/auditor in evidence collection, analytical review procedures and reporting, the CPA/auditor's ethical and legal responsibilities, the role of the Securities and Exchange Commission as well as other constituencies. Audit testing, including statistical sampling, internal control issues, and audit programs are discussed. --
Description:
Red flags that should alert an auditor to potential fraud include missing documents, alterations on documents, photocopied documents, second endorsements on checks, unusual endorsements, old outstanding checks, unexplained adjustments to accounts receivable and inventory balances, unusual patterns in deposits in transit, general ledgers that do not balance, cash shortages and overages, excessive voids and credit memos, customer complains, common names or addresses for refunds, increased past due receivables, inventory shortages, increased scrap, duplicate payments, employees that cannot be found, dormant accounts that have become active.
Auditors must always presume that improper revenue recognition is a fraud risk. Auditors must identify risks of management override of controls, examine journal entries and other adjustments, review accounting estimates for biases, and evaluate business rationale for significant unusual transactions.
Auditors must change the overall conduct of the audit to respond to identified fraud risks (i.e. assigning more experienced personnel to the audit or even a fraud specialist). They should design and perform audit procedures to address identified risks. Appropriate audit procedures used to address specific fraud risks depend on the account being audited and type of fraud risk identified.
Further red flags to auditors include discrepancies in the accounting records, conflicting or missing evidential matter, problematic or unusual relationships between the auditor and management, results from substantive of final review stage analytical procedures, and vague, implausible or inconsistent responses to inquiries.
Evidence that fraud may exist MUST be communicated to the appropriate level of management. Sarbanes Oxley states that significant deficiencies must be communicated to those charged with governance. Any fraud committed by management (no matter how small) is material.
It is important to have a culture of honesty and high ethics (i.e. management "setting the tone at the top). Management must create a positive workplace environment, hire and promote appropriate employees, provide adequate training, and require employees to periodically confirm their responsibilities for complying with the code of conduct. Management has the responsibilities to evaluate risks of fraud, having to identify and measure fraud risks, and design and implement controls to mitigate fraud risks. For high fraud risk areas, management should periodically evaluate whether appropriate antifraud programs and controls have been implemented and operating effectively.
Auditors are required to be skeptical (professional skepticism). Auditors should not dismiss information that may be important to an audit. This information may include observations about employee behavior that might indicate a willingness to participate in fraud.
Internal control is a management process involving the people of the organization (the responsibility lies with management and the board of directors). Internal controls are designed to provide reasonable assurance regarding the safeguarding of assets, ensuring financial statement reliability, promoting operational efficiency, and encouraging compliance with management's directives.
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