auditing in a fraud environment (ea) ho

7/31/2019 Auditing in a Fraud Environment (EA) HO

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Appointment of auditor

For public companies, the directors appoint the first auditor of the company. The auditor thenholds office until the end of the first meeting of the company at which the directors lay its

accounts before the members. At that meeting, the members of the company can re-appoint theauditor, or appoint a different auditor, to hold office from the end of that meeting until the end of

the next meeting at which the directors lay accounts.

A casual vacancy in the office of the auditor may be filled by appointment by the directors or bythe company in a general meeting. Until such appointment is made, the continuing or surviving

auditors may perform the role of auditor.

For private companies, the directors appoint the first auditor of the company. The members maythen appoint or re-appoint an auditor at a meeting of the company's members, or by written

resolution, within 28 days of the directors sending the accounts to the members. If they do not do

so, however, the appointed auditor remains in office until the members pass a resolution to

reappoint him or to remove him as auditor (5% of members, or fewer if the articles say so, can

force the consideration of a resolution to remove an auditor). This provision about remaining in

office, however, does not apply if the auditors most recent appointment was by the directors or

the companys articles require annual appointment.

Statutory Obligation

It is a duty imposed by the law. Auditors have statutory obligations because people want to beassured that the auditor has checked that certain matters e.g. laws and policies have been followed

and adequate records have been kept.

Other Obligations

The main other obligation is to report serious irregularity e.g. improper use of the organisationsfunds.

The role of the External Auditor

According to the ISA 200 Objective and General Principles Governing an Audit of Financial Statement,

the object of the audit is to enable the auditor to express an opinion whether the financial statements areprepared, in all material respects, in accordance with an identified financial reporting framework.

The auditor does not certify the financial statements or guarantee that the financial statements are correct,

he reports that in his opinion they give a true and fair, or present fairly the financial position.

In addition, ISA 200 contains an objective relating to situations where reasonable assurancecannot be obtained, in which case the auditor, depending on the circumstances, may qualify the

audit opinion, or disclaim an opinion, or withdraw from the assignment.

What is trueand fair? Truth in accounting is quite different from scientific truth (conforming to reality, exact, accurate

formation). Accounting does not deal with that type of truth which has a fixed an unchanging

quality. No material misstatement.

The word fair has the following meanings: on the one hand clear, distinct and plain, and on theother impartial, just and equitable.


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Some DOs and DONTs of External Auditing

DOS DONTS

Auditors maintain independence from management

and directors so that the tests and judgments are

made objectively

Look at every transaction carried out by the

organization

Auditors discuss the scope of the audit work withthe organisation

Test the adequacy of all of the organisationsinternal controls

Auditors determine the type and extent of the audit

procedures they will perform depending on the

risks and controls they have identified

Identify all possible irregularities

Auditors form an opinion on the

information in the financial report

Audit other information provided to the members

of the organisationeg the directors report

What is fraud?

Fraud is a deliberate misrepresentation of a material fact to gain an unfair advantage.

Misstatements related to fraud:1. Misstatements arising from fraudulent financial reporting

intentional misstatements or omissions of amounts or disclosures designed to deceive financialstatement users

usually involving the override of controls by management2. Misstatements arising from misappropriation of assets

involving theft and embezzlementof an entitys assets

The detection of fraud and error

Following a judgement in 1859, stating that it was part of the auditors duties to discover fraudulentmisrepresentations, the detection of fraud and error became the major objective of company audits.

However, during the latter part of the nineteenth century, there was a growing school of thought that the

prevention of fraud and error as opposed to its detection should be the major objective of the auditor, and

that the management of a company should play a greater part and accept a larger degree of responsibilityin this respect.

The leading case, which established the fact that the auditor should not be responsible for finding every

fraud or error, is the Kingston Cotton Mill case of 1896. Here the judgement pronounced that the

auditors role should be likened to that of a watchdog rather than a bloodhound, and that what wasrequired of him was that he should as with such reasonable care and skill as was appropriate in the

circumstances. Later cases confirmed this view of the auditor.

Obviously, with the growth of professionalism, the degree of care and skill expected of the auditor

increased in the eyes of the public. The various accountancy bodies recognised this fact and sought by

various means to improve the standard of auditing.

There is no statutory duty to seek out fraud. The auditors duty under statute is confirmed to expressing

an opinion as to whether the financial statements under review show a true and fair view of the

companys results and position, and comply with the Companies Acts. To discharge this duty, he must


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carry out such audit procedures as he thinks necessary in the light of the companys circumstances and ofcurrent auditing standards. Material discrepancies should be discovered as a result of normal audit

procedures and of course the very existence of an audit may itself act as a deterrent. The detection of

errors or fraud is therefore not the main objective of the audit.

External Audit Procedures

Conduct enquiries of management and others within the entity, including:

The Audit Committee Internal auditors Those outside management (e.g. operational personnel) Those outside the finance function (e.g. in-house legal counsel) Consider results of analytical procedures (including revenue analytics) Be aware of conditions generally present to commit fraud and assess risks of fraud throughout the

audit

Evaluate managements programmes and controls relating to fraud Examine journal entries and other adjustments Review accounting estimates, current and retrospective, for biases Evaluate business rationale for significant unusual transactions Add an element of unpredictability in audit procedures year to year Use of fraud or forensic specialists - if applicable

auditing in a fraud environment (ea) ho

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