Post-Conference Auditing and Investigating Fraud Seminar

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1 Post-Conference Auditing and Investigating Fraud Seminar Auditing Track Auditors Fraud Responsibilities 1 of 18

2 Introduction Differing roles one goal External auditor Internal auditor Fraud examiner 2 of 18

3 AU Section 240 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. 4 of 18

4 Components of AU Section 240 Description and characteristics of fraud Professional skepticism Engagement personnel discussion Obtaining audit evidence Identifying risks Assessing the risks Responding to the risk assessment Evaluating audit evidence Communicating possible fraud Documenting consideration of fraud 6 of 18

5 Summary AU Section 240 External auditors are responsible for: 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 Understanding the causes and signs of fraud Assessing risk of material misstatement due to fraud Exercising due care in planning, performing, evaluating, and documenting the audit 7 of 18

6 Summary AU Section 240 External auditors are responsible for: Maintaining professional skepticism Assigning significant engagement responsibilities to 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 8 of 18

7 Summary AU Section 240 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 providing a qualified opinion 9 of 18

8 Summary AU Section 240 External auditors are responsible for: Withdrawing if uncertainties about fraud cannot be resolved and management cooperation is unsatisfactory Communicating the reasons for withdrawal to those charged with governance Informing those charged with governance of fraud, except when clearly inconsequential Disclosing fraud to outside agencies in limited circumstances 10 of 18

9 Summary AU Section 240 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 11 of 18

10 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. 12 of 18

11 Internal Auditor Responsibilities International Standards for the Professional Practice of Internal Auditing Practice Guide: Internal Auditing and Fraud 13 of 18

12 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 14 of 18

13 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 controls related to fraud 15 of 18

14 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. 16 of 18

15 Practice Guide: Internal Auditing and Fraud Internal audit s role in fighting 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. 17 of 18

16 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 18 of 18