What are the responsibilities when fraud is suspected as well as the Auditing st

Question

What are the responsibilities when fraud is suspected as well as the Auditing standards required to document fraud? I am developing the various audit programs for Perfect Programming (PP) and haven't worked on the fraud one yet. MF suggested that I could just rely on the errors and irregularities program. I told him I wasn't sure that would do the trick. MF said he doesn't expect any issues on this engagement. I told him I was worried that the PP has a new CEO (Mr. Jones) and that Jones earns almost no salary-just bonuses and stock options. Jones is really optimistic about how things are going, promising the board PP will see a 30% increase in earnings in 2018. MF says not to worry, we are auditing 2017, Jones has only worked there for a few months, and Jones was hired by someone who knew him well (Sally Murphy, the chair of the audit committee). The old CEO is now is Florida most of the year (although he is still on the board) but is reachable if there are questions. The old CEO was really frustrated with the company employees, in fact, he decided to fire most of the internal audit staff and the previous auditor before bringing in our firm (and MF as partner) two years ago.I argued that the old CEO ran the place with a dominating style, and it may be that Jones is headed that way too MF says its not our job to worry about management style or fraud- it's management's job And, the company has always presented financial statements that are fairly stated. PP does have an issue with a material weakness in internal controls around cash disbursements-but MF says we will just test that area carefully in our tests of transactions- and we will report that material weakness. MF argues its basically a segregation of duties issue where people who have conflicting duties can access checks. MF doesn't seem concerned about the rumors are circulating at PP that big layoffs are planned at PP later this spring. He's says not to worry about that - in fact, if anything, reductions in costs (salaries) will help Jones and his team meet the goals of increased earnings growth. MF says I should focus on completing the audit programs for the various cycles and for errors and irregularities and the audit will be good to

Explanation / Answer

Explanation :

1. The primary responsibility of an auditor is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, thereby enabling him to express a correct opinion on such financial statements.

2. Fraud Risk Factors : Yes, We might be at a risk for misappropriation of assets. There are indicators that provide management an opportunity to commit fraud. The new CEO (Mr. Jones) only receives or is compensated with only bonuses and stock option. And also that he is very much interested in earnings as he has given a commitment that PP will see a 30% increase in earnings. This needs to be properly analysed in order to avoid short term as well as long term losses.

3. Fraud Risk factors resulting from misappropriation of assets :

a) Incentives & Pressures : There is a material weakness in cash disbursements. This might give an opportunity to employee to commit cash fraud.There have also recently been changes in the employees while some of them are moved out. This might lead to fraud from others or past employees & most important the fraud commited by others shall be shifted on to past employees. There are planned lay offs ahead. This might lead to opportunities of misappropriation of assets further. So, this needs to taken note of. It needs to be audited immediately.

4. Responsibility of auditor in case of suspected fraud and required documentation :

The auditor in such cases should consider the potential effect of suspected fraud on the financial information. If he believes that the suspected fraud could have a material effect on financial information, he should perform some modified or appropriate procedures as he may deem fit. If the auditor believes, that there is an indication of fraud, the auditor should properly analyse the other aspects of audit as fraud can be committed in any part of audit.

Other responsibilities of auditor :

The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting one resulting from error. When obtaining reasonable assurance, the auditor is obliged to maintain professional skepticism throughout audit. Particularly, the auditor here must focus on management fraud that too nearing the end of the year. As, management is in a position to cleanly manipulate the financial statements. So, the year end transactions must be taken a note of. For instance : fictitious journal entries. If some explanation given by the management / others is not satisfactory/ seems suspicious, then a written representation to that effect may be obtained. Inquiries of management should also be conducted. For instance, what approach have they adopted for identifying misstatements, internal controls opinion of management. What is their process to identify and respond to fraud ? etc. Also, communication from previous auditor is essential if there has recently been such change in auditors of the company.

Documentation part : The auditor, if comes across situation leading to suspected fraud, he may request management for correcting the financial information or extending his audit procedures. If the management does not correct the information & the extended audit procedures does not lead the management to conclude that identified misstatements are not material, then auditor should express a qualified or adverse opinion as he considers important. He should also communicate with management about this matter on a timely basis & report appropriately. Also, all the legal compliances in such cases need to be taken into consideration.

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