Auditors(TM) Perceptions of Responsibilities to Detect and Report Fraud Meeting Societal Expectation

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Auditors’ Perceptions of Responsibilities to Detect and Report Fraud Meeting Societal Expectation


Contents

Abstract .............................................................................................................        ii

Introduction .......................................................................................................        1

Auditors’ Responsibilities to Detect and Report Fraud................................................        2-4

Controversial Issue on Detection and Reporting of Fraud...........................................        5-6

Societal Expectation on Detecting and Reporting Fraud..............................................        7-8

Possible Solutions on Fraud Detection ....................................................................        9-11

Conclusion .........................................................................................................        12

Bibliography .......................................................................................................        13-15


Abstract

Audit acts as an important safeguard for the users of financial statements; it represents a major disciplinary force on corporate conducts. However, the pervasive problem of continuous corporation fraud leads controversy between auditors and society regarding the perception of auditors’ role. This paper lists out the auditors’ responsibilities to detect and report fraud in accordance with the existing auditing standards and explores how the perception of auditors and society perceive the auditors’ role and the reason of controversial issue arise. Research shows that it is impossible for auditors to disclose all fraud including collusion and complicated schemes Thus, to narrow the expectation gap and restore societal confidence in auditing and auditing profession, auditors should expand their role in alignment with the societal perception.


Introduction

An audit represents a major disciplinary force on corporate conducts and so acts as an important safeguard for the financial statements’ users. Auditors therefore should opine “true and fair” on the financial statements so that some assurance of reliability of the financial statements is being provided. (Lau, P. T. Y. and Millichamp, H. H., 2004) Unfortunately, corporation fraud continues to pervasive problem, controversy has existed between auditors and society regarding the perception of auditors’ role. Auditors are expected to detect all fraud as auditors have legal right to investigate the organization, and all its records and seek for explanations and information from the employees and management of the organization. (The Institute of Chartered Accountants in England and Wales, 2006)

The purpose of this paper is to demonstrate my ability to carry out independent research by undertaking a literature based academic investigation and extend my knowledge in auditors’ perceptions of their responsibilities, controversy, societal expectation and possible solutions in relation to fraud detection and reporting.

By undertaking a review of the relevant auditing standards, journals, articles and academic books, this paper will discuss and evaluate the legal requirements and the responsibilities placed on auditors in regards of fraud detecting and reporting, the reasons of controversy arise, societal expectations on auditors’ role, and possible solutions for auditors to stifle continuing public and political criticism.


Auditors’ Responsibilities to Detect and Report Fraud

Fraud has become one of the most important issues within accountancy profession over recent years. Auditors have suffered a significant amount of embarrassment because of the failure in detecting and reporting fraud. (Collings, S., 2008) In attempting to stifle continuing public and political criticism, regulatory bodies in different countries have established new rules and regulations in clarifying the auditors’ responsibilities to detect and report fraud. (Porter, B. A., 1995)

In Hong Kong, auditors should carry out an audit according to the Hong Kong Standards on Auditing (HKSAs). HKSAs was set by Hong Kong Institute of Certified Public Accountant (HKICPA) converge towards International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFA). Information contained in HKSAs extents the consistency with the correspondent International Standard on Auditing (ISAs). (Hong Kong Institute of Certified Public Accountants, 2008)

HKSA 240/ISA 240 (Revised), “The Auditor’s Responsibilities to Consider Fraud in an Audit of Financial Statements”, which has adopted the basic principles and necessary procedures of Statement of Auditing Standards (SAS) no. 99 of The American Institute of certified Public Accountants (AICPA), “Consideration of Fraud in Financial Statement Audit”, provides guidance on auditors’ duty in detecting and reporting fraud during audit. (International Federation of Accountants, 2007)

Stated in HKSA 240, auditors are required to plan and perform an audit minimizing audit risk to a reasonably low level and maintain an attitude of professional skepticism recognizing circumstances that possibly cause material misstatement as result of fraud or error, ignoring past experience with the entity regarding honesty and integrity of management and those charged with governance in accordance. (Hong Kong Institute of Certified Public Accountants, 2008)

Stated in HKSA 315 “Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement”, members of engagement team are required to discuss the possibility that the entity’s financial statement could be materially misstated due to fraud. Engagement partners should think about which circumstances to be communicated to members of the engagement team not involved in the discussion. (Hong Kong Institute of Certified Public Accountants, 2008)

SAS no. 99 develops a further requirement for discussion among the engagement team that a new concept of “brainstorming” is required in auditing literature. Brainstorming creates ideas for engagement team about how the entity might commit and conceal fraud and assists engagement team to set the appropriate “tone at the top” in respond to identified risks when carrying out an audit. (Ramos, M., 2004) Brainstorming fraud risk is critic as a successful audit that auditors are capable to recognize red flags for fraud. Brainstorming will build up auditors’ mindset supporting the adage of “to catch a crook, learn to think like one” which allows auditors to think like a fraudster. (Zikmund, P.E., 2008)

In addition, SAS no. 99 requires those discussions among engagement team should capable to identify fraud risks, engagement team should always keep in mind that the characteristics of encouragements, probabilities and capability to devise superficially rational are present when occurring frauds. Engagement team should always consider about and examine questions during an audit for gaining better position in planning audit tests responsive to fraud risks. Auditors should always go into an audit anticipating there may be some level of fraudulent activity. (Moeller, R. R., 2004)

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Besides, auditors are required to perform risk assessment procedures in order to understand the entity and its environment including its internal control. Auditors should properly make inquires of management, those charged with governance and others inside the entity and obtain an understanding of how those charged with governance apply oversight of management’s processes for recognizing and responding to fraud risk and internal control established by management to reduce these risks. Further, auditors should consider whether one or more fraud risk factors are presents in information obtained. Any unusual or unexpected relationships that have been recognized in performing analytical procedures ...

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