You are auditing Company XYZ. You learn that last year the company performed poo

Question

You are auditing Company XYZ. You learn that last year the company performed poorly due to high operating expenses and the CEO indicated that if expenses were not significantly reduced this year, he was going to have to replace some key personnel including the accountant. Considering this,

which assertion regarding operating expenses would you be mostly concerned about testing, Completeness or Occurrence?

Why?

If during the audit you found out that the accountant had committed financial statement fraud by understating expenses, which element of the fraud triangle would be most relevant?

Explanation / Answer

The assertion with regard to operating expenses that I would be concerned about testing would be “occurrence”. The reason is that as the operating expenses are high it will be important to test whether the transactions (related to operating expenses) that are recognized in financial statements have actually occurred and relate to the organization. Here vouching will help to trace a recorded operating expense to the supporting document.

The element of fraud triangle that will be most relevant when the accountant has understated expenses is “opportunity”. I will have to determine what opportunities and access enables the accountant to commit the fraud in the first place and then conceal it from the management. This will ensure that such an incident does not occur in future again and that internal controls within the organization are strengthened.

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