Should External/Internal Auditors Be Responsible for Detecting Client Fraud?

In: Business and Management

Submitted By yonghoplus
Words 439
Pages 2
Should external/internal auditors be responsible for detecting client fraud? In 2001 Enron, the seventh largest energy company in 2001, filed for bankruptcy. The event named “Enron Scandal” is considered to be the most shocking incident in American economic history. Bring the country to the edge of disaster, the scandal was basically caused by securities fraud which Enron was charge with. The irrationality of accounting and auditing system encouraged U.S. legislative to respond the scandal, enacting Sarbanes-Oxley Act 2002. SOX Act carried out comprehensive reform of accounting procedures required for publicly held companies, such as promoting and improving the quality and transparency of financial reporting by internal and external auditors. However, there is a controversial issue of whether auditors should be responsible for detecting client fraud. AU Section 110(Responsibilities and Functions of the Independent Auditor) indicates that “the auditor has a 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.” In other words, auditors are not expected to provide absolute assurance financial statements because auditors do not examine every transaction and event. The public, however, expect auditor to guarantee all material misstatements. While users who use the reported financial statements expect all illegal issues such as fraud to be detected, auditors are more likely to consider misstatements in the financial statements reported by management. Senior editor Sarah Johnson notes in her 2010 article in CFO.com “the Public Company Accounting Oversight Board (PCAOB) is also trying to close the expectations gap between what investors expect and what auditors do.” Therefore, auditors are not entirely responsible for all kinds of fraud…...

Similar Documents

Co-Operation Between Internal and External Auditors: a Comparative Study on Nationalized and Foreign Banks in Bangladesh

...September 2010. Pp. 22 - 35 Co-operation between Internal and External Auditors: A Comparative Study on Nationalized and Foreign Banks in Bangladesh Rehana Fowzia Effective co-operation between internal and external audit leads to a range of benefits for both parties, and the clients they serve. This study comparatively examines the influence of different factors on co-operation between internal and external auditors of foreign banks with nationalized banks in Bangladesh. Empirical evidence reveals that co-operation promoted through management and the audit committee is the most important factor for assessing co-operation between internal and external auditors in both nationalized banks and foreign banks. The overall comparative analysis shows that the total difference regarding the contribution of diverse factors on assessing the co-operation between internal and external auditors between nationalized banks and foreign banks is insignificant. But the position of nationalized banks is better than foreign banks in Bangladesh. Keywords: Internal auditor, External auditor, Co-operation, Nationalized banks, Foreign banks. Field of Research: Auditing. 1. Introduction Internal auditors are employees of a company hired to assess and evaluate its system of internal control. To maintain independence, they present their reports directly to the board of directors or to top management. They provide functional operation to the concern. Internal auditors are employed by the organization......

Words: 6181 - Pages: 25

The Changing Role of External Auditor

...accounting records to be audited and in true and fair view. Independence of the auditors also being underline in the Act, where any relationship between the independent auditor and the companies must be disclose, to prevent any conflict in interest when auditing the accounting records. The external auditors were given the power to obtain information and inspect the accounting records of the companies because of the nature of their duties. As stated in Companies Act 1965 section 174 (2)(a), the roles of an auditor is to report the consolidated accounts by give a true and fair view as required by section 169 and in accordance with the applicable approved accounting standards. In 1971, during the implementation of New Economic Policy (NEP), where after the eruption of violence between Malays and Chinese in 1969, Malaysia economy change its direction from to target foreign interest of free enterprises towards in the control of the government. By the strong presence of the government to improve and balance the economics including the incomes distribution and assets ownerships, Malaysian now has a shared goal together in socio-economic; and thus increase the demand for the independent auditors and present more existence. During 1980s, Malaysia was in economics recession where NEP was slowly being discarded by the local communities and come to an end. There are no any significant changes in the roles of the auditors in late 1980s when started the operation of KLSE and amendment......

Words: 1490 - Pages: 6

External Auditors Do Not Rely on Internal Auditors as Much as They Could – Why?

...External auditors do not rely on internal auditors as much as they could – why? How could this reliance be improved? Presented By Mingdi Deng Shirene Horner Yueyang Shi Trevor Stewart Jingtao Wang CONTENTS                                                                                                            PAGE ABSTRACT 3 1. INTRODUCTION 3 2. REASONS 3 2.1 INTERNAL AUDITOR ROLES 3 2.2 THE REPORTING AND OBJECTIVITY RELATIONSHIP OF THE INTERNAL AUDITOR 4 3. COLLABORATION IN PRACTICE 5    3.1 COMMUNICATION AND COOPERATION 5 3.2 PROFESSIONAL STANDARDS 5 3.3 RECORDING AND TESTING ACCOUNTING SYSTEMS 6 3.4 SUBSTANTIVE TESTS 6 4. CONSEQUENCES OF INFLUENCE                            7 5. RELIANCE IMPROVEMENTS                                      8 5.1 ATTEMPTS FOR IMPROVEMENT 8 5.2 INCREASE THE EFFICIENCY AND COMMUNICATION METHOD FOR INTERNAL AUDITORS AND EXTERNAL AUDITORS 8 5.3 FURTHER EDUCATION......

Words: 4113 - Pages: 17

External Auditing 555

...External Auditing Week 3 Homework Chapter 6, pages 166–170: Problems 6-19, 6-20, and 6-27 Chapter 7, pages 198–200: Problems 7-25, 7-26, 7-27, and 7-28 Chapter 8, pages 236–237: Problems 8-25 and 8-28 Chapter 6, pages 166–170: Problems 6-19, 6-20, and 6-27 6-19 (Objective 6-1) The following questions concern the reasons auditors do audits. Choose the best response. a. Which of the following best describes the reason why an independent auditor reports on financial statements? * Answer: (2) Different interests may exist between the company preparing the statements and the persons using the statements. b. Because of the risk of material misstatement, an audit should be planned and performed with an attitude of * Answer: (2) independent integrity. c. The major reason an independent auditor gathers audit evidence is to * Answer: (1) form an opinion on the financial statements. 6-20 (Objective 6-3) The following questions deal with errors and fraud. Choose the best response. a. An independent auditor has the responsibility to design the audit to provide reasonable assurance of detecting errors and fraud that might have a material effect on the financial statements. Which of the following, if material, is a fraud as defined in auditing standards? Answer: (1) Misappropriation of an asset......

Words: 1672 - Pages: 7

What Should Auditor Audit

...What Should the Auditor Audit? Successful operational auditing begins with the auditor understanding the business: What are the core products, business units, and employee and customer bases? How can the auditor begin to survey the business to begin to put an audit plan together? What resources are available or should be accessed by the auditor? There are various types of audits depending on the specific type of audit being performed. However, even though there are different types of audits, the audit procedure should remain the same. The audit should look for compliance with the policies and procedures. The Auditor should investigate and evaluate the level of compliance and the effectiveness of the company or organizations. Depending on the type of audit being performed, the audit will evaluate and identify financial issues within the company to determine if it finances are allocated the way they are supposed to be. The auditor also looks at inconsistences to determine if there is a possibility of theft or fraud. There are two different types of auditors, internal and external. Operational auditing is considered to be an internal audit. In today’s society it has become very important to the organization, especially with so much diversity in businesses. An operational audit will allow for the diversified product lines while establishing a global presence. The internal auditors will have to have an in-depth knowledge and a higher level of expertise to maintain the......

Words: 587 - Pages: 3

The Effects of Longterm Auditor-Client Relationship on Audit Quality

...THE EFFECTS OF LONG-TERM AUDITOR - CLIENT RELATIONSHIP ON AUDIT QUALITY IN SMEs INTRODUCTION 1.1 BACKGROUND TO THE STUDY Small and medium-sized enterprises (SMEs) play a vital role in the economy of any country, and the impact of their growth is experienced positively across the overall economy. As stated by the European Commission report, Small and Medium-sized Entities (SMEs) represent 99% of all the entities operating in Europe, and have been important for both the social and economic developments in Europe. In Europe, micro-enterprises within the SMEs are considered to be the real giants of European economy, and are the ones with fewer than 10 employees. As per the stats of Eurostat, 67% of the privatesector jobs in Europe are created by SMEs, which represents a major share in the overall economy of a country (European Commission, 2008). Most SMEs encounter limited financial as well as non-financial resources. They depend upon the creditors like banks and other financial institutions, or private equity. In this regard, banks have become one of the major sources for SMEs fulfilling their financial requirements. However, banks are less likely to provide loans without any reasonable assurance of creditability of the firms. Banks generally rely on the financial information of the firms. They do prefer credible audited financial statements by independent auditors as a matter of assurance. In other words, most banks view auditing as a guarantee for the quality of......

Words: 2429 - Pages: 10

Corporate Fraud and the Role of Auditors

...CORPORATE FRAUD & THE ROLES OF AUDITOR (BANGLADESH PERSPECTIVE) Submitted To: Tahmina Ahmed Lecturer Department Of Accounting And Information Systems University Of Dhaka. Submitted By: Group No. 02 ID 18003 18051 18053 18073 18089 18200 NAME Safiqur Rahman Mahadin Anik Mahmudul Islam Arnab Kumar Chakrabartty Abdullah Al Noman Namrata Chakma Date of Submission: November 11, 2014. 1|Page This Report Includes The Following Contents Chapter No. Contents Page No. 01.Introduction 1.1 1.2 1.3 1.4 Introduction. Scope of the report. Objective of the report. Limitations of the report. What is corporate fraud? Kinds of corporate frauds. Reasons for corporate fraud. Auditor’s role. Bangladesh perspective. Findings of the study. 03 03 03 04 04 05 05 06 09 10 02.Literature Review 2.1 2.2 2.3 2.4 2.5 03.Findings Of The Study 3.1 04.Conclusion & Recommendations 4.1 4.2 Conclusion. Recommendations. 12 13 05. References. 5.1 References. 14 2|Page CHAPTER 1 INTRODUCTION 1.1 WHAT IS CORPORATE FRAUD AND WHAT WE ARE GOING TO DO THROUGHOUT THE WHOLE REPORT? The term ‘Fraud’ essentially includes the use of deception to make some personal gains for oneself dishonestly obviously and create some losses for another within the organization or outside the organization. Although definitions of corporate fraud vary in different situations, most of them are based on these general themes. The term ‘Corporate Fraud’ usually includes activities such as corruption, misuse of......

Words: 3700 - Pages: 15

Why an Internal Auditor?

...Recommendation Brief for an Internal Auditor Candace L. Beard ACC 544 May 23, 2011 Joseph Poletti Recommendation Brief for an Internal Auditor Internal auditing helps companies to look at ways of improving and achieving short-term and long-term objectives. Internal auditors are hired to perform internal audits that look at a company’s operations, investigating fraud, financial reporting, safeguarding assets, and compliance of the laws and regulations set for companies. The internal auditors are employed to improve a company’s internal controls. Effective working internal controls detect and prevent fraud that is tested by internal auditors. Benefits of Internal Auditor Understanding the benefits of an internal auditor will help in the decision of hiring an internal accountant. Internal auditors verify the effectiveness of their organization's internal controls and check for mismanagement, waste, or fraud. They examine and evaluate their firms' financial and information systems, management procedures, and internal controls to ensure that records are accurate and controls are adequate. They also review company operations, evaluating their efficiency, effectiveness, and compliance with corporate policies and government regulations (Bureau of Labor Statistics). As an internal auditor he or she will be able to look for any mistakes and address them in the reports. Finding a professional to fill the role of an internal auditor benefits the structure of a growing......

Words: 698 - Pages: 3

Internal Auditor

...Recommendation Brief for an Internal Accountant Internal auditing helps companies to look at ways of improving and achieving short-term and long-term objectives. Internal auditors are hired to perform internal audits that look at a company’s operations, investigating fraud, financial reporting, safeguarding assets, and compliance of the laws and regulations set for companies. The internal auditors are employed to improve a company’s internal controls. Effective working internal controls detect and prevent fraud that is tested by internal auditors. Benefits of Internal Auditor Understanding the benefits of an internal auditor will help in the decision of hiring an internal accountant. Internal auditors verify the effectiveness of their organization's internal controls and check for mismanagement, waste, or fraud. They examine and evaluate their firms' financial and information systems, management procedures, and internal controls to ensure that records are accurate and controls are adequate. They also review company operations, evaluating their efficiency, effectiveness, and compliance with corporate policies and government regulations (Bureau of Labor Statistics). As an internal auditor he or she will be able to look for any mistakes and address them in the reports. Finding a professional to fill the role of an internal auditor benefits the structure of a growing business, because it prevents the creation of faulty processes and limits the liability the company may be......

Words: 676 - Pages: 3

Internal External Factors of Management

...Components that Affect Mitchells Fruit Farms Organization's External Environment Generally, The external environment of an organization are those factors outside the company that affect the company's ability to function. Some external elements can be manipulated by company marketing, while others require the organization to make adjustments. Monitor the basic components of company's external environment, and keep a close watch at all times. Customers customers are among the external elements you can attempt to influence, via marketing and strategic release of corporate information. But ultimately, your relationship with company’s clients is based on finding ways to influence them to purchase company’s products. Market research is used to determine the effectiveness of company’s marketing messages, and to decide what changes can be made to future marketing programs to improve sales. Government Government regulations in product development, packaging and shipping play a significant role in the cost of doing business and company’s ability to expand into new markets. If the government places new regulations on how you must package company’s product for shipment, that can increase company’s unit costs and affect company’s profit margins. International laws create processes that company’s company must follow to get your product into foreign markets. Economy As with the majority of the elements of your organization's external environment, your company must be efficient at......

Words: 1717 - Pages: 7

Financial Statement Fraud

...Financial Statement Fraud ACCT 710: Assignment 6-2 Shannon Baxley David Welch September 24, 2011 Table of Contents Abstract………………………………………………………………………………………3 Introduction…………………………………………………………………………………..3 Literature Reviews……………………………………………………………………………5 Conclusion…………………………………………………………………………………..16 References…………………………………………………………………………………...18 Abstract This paper describes financial statement fraud (FSF) and how it may occur within companies. The reason of this study was to research FSF detection and prevention. Research was also done to determine any influences that SAS (Statement on Auditing Standards) No. 82 and SAS No. 99 had on audit programs and the analysis from external auditors. Thirteen scholarly journals were reviewed in order to analyze SAS No. 82 and No. 99 and to show ways to detect and prevent fraud. Results found that managers and/or auditors can create fraud intentionally and unintentionally. There are ways to prevent fraud and educating managers and/or auditors is a good way to make sure fraud does not occur. Introduction Financial statement fraud (FSF) involves the premeditated issuing of phony information on a financial statement (financial statement fraud, 2011). FSF occurs when a company exaggerates assets or revenue, or when it devalues liabilities and expenses (financial statement fraud, 2011). The American Institute of Certified Public Accountants or AICPA defines fraudulent financial reporting as “intentional misstatements or......

Words: 5162 - Pages: 21

The Role of Auditors in Fraud Detection, Prevention and Reporting in Nigeria

...THE ROLE OF AUDITORS IN FRAUD DETECTION, PREVENTION AND REPORTING IN NIGERIA Ayobami Oluwagbemiga Oyinlola Mr Tai Solarin University of education,Ijagun, Ijebu-Ode, oluwagbemiga@in.com Follow this and additional works at: http://digitalcommons.unl.edu/libphilprac Part of the Library and Information Science Commons Oyinlola, Ayobami Oluwagbemiga Mr, "THE ROLE OF AUDITORS IN FRAUD DETECTION, PREVENTION AND REPORTING IN NIGERIA" (2010). Library Philosophy and Practice (e-journal). Paper 517. http://digitalcommons.unl.edu/libphilprac/517 THE ROLE OF AUDITORS IN FRAUD DETECTION, PREVENTION AND REPORTING IN NIGERIA OYINLOLA OLUWAGBEMIGA oluwagbemiga@in.com Tai Solarin University of Education, Ijagun , Ijebu-ode Ogun State. Abstract This study investigates the role of auditors in the detection, prevention and reporting of fraud. Data were obtained from 184 respondents in Nigeria. The findings revealed that the respondents are very concerned about the problem of fraud. In addition, the respondents placed very high expectation on auditors’ duties on fraud prevention and detection. This perception is in contrast with the stated primary objective of an audit, as stipulated in ISA 200, which merely required auditors to form an opinion on the financial statements, but not of fraud detection. Keywords: Auditors, fraud, detection, prevention Introduction That an auditor has the responsibility for the prevention, detection and reporting of fraud, other......

Words: 3964 - Pages: 16

Internal Auditor Recommendation Brief

...Internal Auditor Recommendation Brief Since Somerset Company has an out-of-control system, the company would be subject to audits from the SEC about their financial statements. In order to prevent this from happening, Somerset should consider hiring an Internal Audit Team of three people. The main focus would be to hire an Internal Auditor that would communicate what is required to prevent fraud, safeguard assets, financial reporting standards and to ensure that the company is in compliance with the SEC regulations. The internal auditor would improve Somerset’s internal controls. In this an explanation of the benefits of hiring an internal auditor, describe the qualifications and qualities needed for an internal auditor for this type of company and a recommendation of an internal auditor that meets the benefits and qualifications for this company. An Internal auditor and the team can validate the company’s internal controls and perform tests for fraud, negligence or waste. Internal auditors ensure that the internal controls are adequate and evaluate the company’s financial and information systems for accuracy. In addition to the benefits of hiring an internal auditor would provide the company a variety of audit services such as operational audits, fraud audit, compliance audits and financial statements audits. Operational audits are the most beneficial to Somerset’s needs in controlling their out of control systems. “An operational audit is a systematic review and......

Words: 662 - Pages: 3

Internal Fraud

...Running head: Internal Fraud Internal Fraud Jennifer England Strayer University Accounting Capstone – ACC 499 Professor Grant A. Wills August 3, 2011 Internal Fraud Infosys Limited is an IT and consulting company, it defines, designs and delivers technology-enabled solutions for Global 2000 companies. Infosys provides business and technology consulting, application services, systems integration, product engineering, custom software development, maintenance, re-engineering, independent testing and validation services, IT infrastructure services and business process outsourcing. Infosys pioneered the Global Delivery Model, which is based on the principle of taking work to the location where the best talent is available, with the least amount of acceptable risk and where it makes the most economic sense. Infosys employs more than 15,000 foreign workers in the United States. In February of this year, a suit was filed in Alabama that accuses Infosys of purposefully sending its Indian employees to work full-time on incorrect visas, and that Infosys was paying these employees in India for full-time work in the United States without withholding federal or state income taxes, and overbilling customers for the labor costs of these employees. Foreign nationals that work in the United Stated on temporary contracts require an H-1B visa. In 2009, increased restrictions began on H-1B visas and in 2010 the application price for H-1B visas doubled, this is when Infosys began......

Words: 1060 - Pages: 5

Article About Internal Fraud

...dramatically. In the past several weeks a former General Electric Capital manager, allegedly in cahoots with a bank vice president, was charged with taking $30,000 in kickbacks as part of a scheme that resulted in $4.5 million of fraudulent loans. A Continental Illinois vice president went on trial charged with approving $1 billion of bad loans in exchange for $585,000 in kickbacks, loans that allegedly cost the Chicago bank $800 million and helped trigger its 1984 collapse. FDIC investigators say internal fraud was the major cause of one-third of all bank failures over the past two years. To some extent the victims have themselves to blame. A company with shoddy financial controls or badly trained internal auditors practically begs employees to steal. Take the case of Albert Miano, a $35,000-a-year middle manager at Reader's Digest, who from 1982 to 1987 embezzled $1 million. The Digest's controls, claims Miano, were woefully lacking. ''I even told them they needed better internal controls,'' he says, ''and they didn't listen.'' Reader's Digest contends its controls, which have since been tightened, weren't all that bad. One day, on a lark, Miano decided to see if he could get a fake invoice through the system. His job was to process the bills from the painters and carpenters who kept the Digest's Pleasantville, New York, headquarters sparkling. He forged the signature of a superior on an invoice for painting that was never done, submitted it to accounts payable, and then......

Words: 2951 - Pages: 12