Post-Conference

Auditing and Investigating Fraud

Seminar

Auditing Track

Auditors’ Fraud Responsibilities

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Introduction

Differing roles—one goal

• External auditor

• Internal auditor

• Fraud examiner

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AU Section 316—Consideration of Fraud

in a Financial Statement Audit

Purpose: to “establish standards and provide

guidance to auditors in fulfilling” their

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.”

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Components of AU Section 316

Description and

characteristics of fraud

Professional skepticism

Engagement personnel

discussion

Obtaining audit evidence

and information

Identifying risks

Assessing the identified

risks

Responding to the risk

assessment

Evaluating audit

evidence and

information

Communicating possible

fraud

Documenting

consideration of fraud

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Summary—AU Section 316

External auditors are responsible for:

• Understanding the causes and signs of fraud

• Assessing the risks of a material financial misstatement

due to fraud

• Planning and performing the audit to obtain reasonable

assurance about whether the financial statements are

free of material misstatement, whether caused by error

or fraud

• Exercising due care in planning, performing,

evaluating, and documenting the audit

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Summary—AU Section 316

External auditors are responsible for:

• Possessing the proper degree of professional

skepticism

• Assigning significant engagement responsibilities to

audit personnel with sufficient experience and training

• Determining whether significant accounting policies

are acceptable

• Auditing large, unusual, or complex transactions

• Evaluating the significance of differences between the

accounting records and the underlying facts

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Summary—AU Section 316

External auditors are responsible for:

• Accumulating potential audit adjustments and

evaluating the combined effect on the financial

statements

• Reporting all instances of fraud to the appropriate level

of management

• Insisting that financial statements affected by a

material fraud be modified or provide a qualified

opinion

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Summary—AU Section 316

External auditors are responsible for:

• Withdrawing if uncertainties about fraud cannot be

resolved and management cooperation is

unsatisfactory, and communicating the reasons for

withdrawal to those charged with governance

• Informing those charged with governance of fraud,

except those that are clearly inconsequential

• Disclosing fraud to outside agencies in limited

circumstances

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Summary—AU Section 316

External auditors are NOT responsible for:

• Authenticating documents

• Uncovering intentional misstatements concealed by

collusion

• Ensuring or guaranteeing that all misstatements are

discovered

• Reporting most instances of fraud to outside agencies

or parties

• Detecting and reporting errors and irregularities in

areas beyond the scope of a financial statement audit

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Risk-Based Audit Approach

PCAOB and AICPA standards emphasize a

risk-based audit approach.

The audit process begins with risk assessment.

Auditors should focus their resources on the

areas of greatest risk.

This tactic is effective for both internal and

external audits.

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Internal Auditor Responsibilities

International Standards for the Professional

Practice of Internal Auditing

Practice Guide: Internal Auditing and Fraud

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International Standards for the Professional

Practice of Internal Auditing

Standard 1210—Proficiency

Standard 1220—Due Professional Care

Standard 2060—Reporting to Senior

Management and the Board

Standard 2110—Governance

Standard 2120—Risk Management

Standard 2130—Control

Standard 2210—Engagement Objectives

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Practice Guide: Internal Auditing and Fraud

Topics covered:

• Fraud awareness

• Potential fraud indicators

• Fraud-related roles and responsibilities

• Internal auditor’s role during audit engagements

• Fraud risk assessment

• Fraud prevention and detection

• Fraud investigation

• Forming an opinion on internal controls related to

fraud

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Practice Guide: Internal Auditing and Fraud

Internal audit’s role in fighting fraud:

• Consider fraud risks in internal control design and audit

steps.

• Have sufficient knowledge of fraud to identify red flags.

• Be alert to opportunities that could allow fraud.

• Evaluate management’s performance with respect to

fraud risk management.

• Evaluate the indicators of fraud.

• Recommend investigation when appropriate.

• Exercise professional skepticism in all audit work.

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Practice Guide: Internal Auditing and Fraud

Other roles and responsibilities for fraud

prevention and detection:

• Board of directors

• Audit committee

• Management

• Legal counsel

• External auditors

• Loss prevention manager

• Fraud investigators

• Other employees