RTI, Nagpur 1 Day 3- Session I Role of audit in consideration of fraud

RTI, NagpurRTI, Nagpur 11

Day 3- Session IDay 3- Session I

Role of audit in consideration of Role of audit in consideration of fraudfraud


Session OverviewSession Overview

Respective roles of audit and Respective roles of audit and management in prevention and management in prevention and detection of frauddetection of fraud

SAI India auditing standards and SAI India auditing standards and ASOSAI guidelines in audit of fraudsASOSAI guidelines in audit of frauds


Learning objectiveLearning objective

Participants will know the Participants will know the

responsibility of auditor in fraud responsibility of auditor in fraud

detection and will be able to apply detection and will be able to apply

the requisite field standards in audit the requisite field standards in audit

planning, having regard to risk planning, having regard to risk

factors including fraud risk factors including fraud risk


Responsibility of managementResponsibility of management

Sound accounting policies and systemsSound accounting policies and systems Sound internal reporting procedures that Sound internal reporting procedures that

include physical verification of cash & include physical verification of cash & inventoryinventory

Sound system of internal control Sound system of internal control Screening of personnel before induction Screening of personnel before induction Sound protection policies in regard to Sound protection policies in regard to

computerized datacomputerized data System for prompt compliance of auditors’ System for prompt compliance of auditors’

recommendationsrecommendations


Responsibility of auditResponsibility of audit

To make a vital difference through To make a vital difference through effective communication of audit effective communication of audit findings and recommendationsfindings and recommendations

To provide a reasonable assurance To provide a reasonable assurance on integrity of financial statementson integrity of financial statements


Auditing Standards- Auditing Standards- consideration of fraudconsideration of fraud

AAS 4 requires:AAS 4 requires: Auditors to adopt professional skepticismAuditors to adopt professional skepticism Active engagement with team members Active engagement with team members

regarding fraud riskregarding fraud risk Evaluation of internal controls to address Evaluation of internal controls to address

fraud riskfraud risk Circumstances indicative of risk of material Circumstances indicative of risk of material

mis-statementmis-statement Necessity of disclosure in case of significant Necessity of disclosure in case of significant

fraudfraud Responsibility to inform, if required, law Responsibility to inform, if required, law

enforcement agenciesenforcement agencies


SAI India- Standards & ASOSAI SAI India- Standards & ASOSAI guidelinesguidelines

ASOSAI: “ while determining materiality levels, ASOSAI: “ while determining materiality levels, SAI should be more responsive to risk arising SAI should be more responsive to risk arising from fraud and corruption”from fraud and corruption”

Basic Postulate-3.2-C&AG’s Auditing StandardsBasic Postulate-3.2-C&AG’s Auditing Standards SAI India should comply with INTOSAI auditing SAI India should comply with INTOSAI auditing

standards in all matters deemed materialstandards in all matters deemed material SAI India-Auditor to exercise own judgment, SAI India-Auditor to exercise own judgment,

depending on circumstances, in determining depending on circumstances, in determining proceduresprocedures– Implies auditor will perform enhanced audit Implies auditor will perform enhanced audit

procedures in case of suspected fraudprocedures in case of suspected fraud


Responsibility for disclosureResponsibility for disclosure ASOSAIASOSAI Responsibility of audit to ensure that Responsibility of audit to ensure that

management has addressed risk of fraud and management has addressed risk of fraud and corruptioncorruption

SAI IndiaSAI India Emphasises consistent application of Emphasises consistent application of

accounting standards for expression of fair accounting standards for expression of fair opinion on financial results of audited opinion on financial results of audited entity(4.6)entity(4.6)

Advises Govt. on acceptable accounting Advises Govt. on acceptable accounting standards for financial reporting & standards for financial reporting & disclosure(4.5)disclosure(4.5)


Responsibility for controlsResponsibility for controls

ASOSAIASOSAI SAI to pro-actively report to mgt to SAI to pro-actively report to mgt to

improve control environment to improve control environment to minimize fraud and corruptionminimize fraud and corruption

SAI IndiaSAI India Auditor is responsible for submitting Auditor is responsible for submitting

proposals and recommendations to proposals and recommendations to improve inadequate controls or to improve inadequate controls or to institute these.(4.7)institute these.(4.7)


Responsibility for performance Responsibility for performance indicatorsindicators

ASOSAIASOSAI Auditor to make mgt aware of need Auditor to make mgt aware of need

for reliable and valid performance for reliable and valid performance indicatorsindicators

SAI IndiaSAI India Emphasizes need for developing Emphasizes need for developing

specific and measurable objectives specific and measurable objectives and performance indicators.(4.10)and performance indicators.(4.10)


Field standards- Planning of auditField standards- Planning of audit

Key factors for risk assessment(4.22)Key factors for risk assessment(4.22) Knowledge of business entityKnowledge of business entity

– Nature of business of the entityNature of business of the entity– Environment in which the business is Environment in which the business is

functioningfunctioning Control environmentControl environment

– Management strengths in terms of quality Management strengths in terms of quality of supervision and effectivenessof supervision and effectiveness

– Allocation of tasks and responsibilitiesAllocation of tasks and responsibilities– Internal auditInternal audit– IT environmentIT environment


Field standards- Planning of Field standards- Planning of audit (Contd.)audit (Contd.)

Accounting Accounting – Susceptibility to fraudSusceptibility to fraud– Accounting methodsAccounting methods– Related party transactionsRelated party transactions– Unusual transactionsUnusual transactions



Internal controlsInternal controls– Segregation of dutiesSegregation of duties– AuthorizationAuthorization– Completeness & accounting of dataCompleteness & accounting of data– Safeguard proceduresSafeguard procedures– Inadequate computer controls not cited Inadequate computer controls not cited

to suppress evidenceto suppress evidence– System of internal auditSystem of internal audit



Information & tips from Information & tips from whistleblowers and publicwhistleblowers and public

Need to adopt professional Need to adopt professional skepticism in high risk areasskepticism in high risk areas


Circumstances indicative of irregularities Circumstances indicative of irregularities requiring substantive testingrequiring substantive testing

Missing documentationMissing documentation Evidence of falsified documentsEvidence of falsified documents Unsatisfactory explanationsUnsatisfactory explanations Unexplained items on Unexplained items on

reconciliation/suspense accountsreconciliation/suspense accounts Evidence of disputesEvidence of disputes Unduly lavish lifestyles by officers & Unduly lavish lifestyles by officers &

employeesemployees Evidence of weak internal controlsEvidence of weak internal controls Unauthorized access to computerized Unauthorized access to computerized

datadata

Documents

RTI, Nagpur 1 Day 3- Session I Role of audit in consideration of fraud