The Importance of Auditing For Preventing Fraudulent Activities
By:
Accounting 302
Dr. Ohene
Spring 2015
Introduction
In the accounting profession, whether its managerial or financial accounting, the systematic examination of the accounting records (books, documents, vouchers, etc) is defined as auditing. The Federal Securities and Exchange Commission, or the SEC, requires companies that are publicly held to have their financial statements examined by an auditor(s). In auditing, the primary purpose is to ascertain how “fair and true” the financial statements represent the issue under concern. Auditing acts in the purpose to add assurance; Assurance is the guarantee that the records and statements have been fairly
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II. Purpose of Audits ( First, Second, and Third Party Audits)
The generalized purpose of audits regardless of internal or external classification, is to provide impartial opinions about the quality of services and/ or products provided by the company as well as assess the various elements that assist in the creation of company produces, development of financial statements, and how (and with what accuracy) the statements are reported. Through first, second, and third party auditing information is evaluated for uses both internal and external by departmental segments of the company (first party) , consumers of the company being audited (second party), and independent auditors that work for neither the supplier nor the consumer (third party). All three forms of audits provide key information that investors, shareholder, possible businesses partners, and consumers would rely on to make decisions. Ultimately, the product of these audits helps minimize the risk associated with those various decisions and illustrate how the entity being audited conducts business.
Internal audits, sometimes referred to as a “first party audit,” are generally performed for the use of the company by a departmental unit from within. The general purpose of such self assessment is to observe procedures and policies within the company to be analyzed and possibly modified accordingly. Company procedures are under
An important decision for any shareholder is deciding whether or not to do business with that company. When a business is audited, the operations are reviewed to make sure that nothing is being hidden. An auditor will review the company’s financial statement and practices to confirm that each are direct and correct. The financial statements are the business’s way of representing them and showing that they are following the Generally Accepted Accounting Principles. The audit process is an important one because it provides a platform for the auditor’s opinion concerning the financial statements of the company. As part of the audit process the auditor will conduct an audit plan that outlines a number of actions that he or she will be perform while also detailing the reason for those actions. With every audit, the business’s management is in charge of handing over the financial statements that the auditor will review; while the auditor will review the statements for any material or immaterial misstatements.
Scoping and Evaluation Judgments in the Audit of Internal Control over Financial Reporting 12.1 EyeMax Corporation . . Evaluation of Audit Differences
Use of due professional care, that is, whether the internal audit group has effective quality control
Due to increasing economic and financial growth, many types of audit have been incorporated throughout the development process of internal activities. Audits can be performed manually or they can incorporate technology. According to Hunton and
Fraudulent, erroneous, and illegal acts committed by a public company, usually at a managerial or executive level, have been a very serious problem for many years and have prompted development of strict and updated regulations, such as the Sarbanes-Oxley Act, in an attempt to prevent these occurrences. Unfortunately, these new or updated regulations are not enough to prevent these acts from happening, thus not alleviating the auditors of their responsibility to detect fraud. Some methods that management and auditors can employ to prevent and detect fraud, errors, and illegal acts are: improving knowledge, improving skills,
The audit risk model has provided a conceptual framework for auditing practice for more than 40 years. Despite practical difficulties in implementation and criticisms of its theoretical foundation, the model has been fairly effective in helping auditors analyze risks and use that analysis to determine the nature, timing, and extent of audit procedures (especially substantive procedures) in audits of financial statements. The audit risk model provides a conceptual framework for the risk assessment standards.
We will conduct our audits in accordance with auditing standards generally accepted in the United States of America (“GAAS”). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether caused by error or fraud. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. The procedures selected depend on our judgment, including the assessment of the risks of material
Internal auditing is an independent objective assurance and consulting acitivity designed to add value and improve an organizations operations.
The Auditors’ responsibility for the detection of fraud is an ongoing issue that is surrounded by much controversy (Gray, Manson and Crawford, 2015). It is believed by many people that Auditors are responsible to detect fraud and have the ability to do something about it, while In fact they have a very limited role in the detection of fraud. The public’s misconception of the auditors roll and what the auditors roll actually is, is referred to as the expectation Gap. In the auditing profession they often have to keep up to date with the up to date standards from the International standards on auditing, these are important, as they are required to keep up with the constant evolving of the rules and what is expected of them. These standards are often referred to as ISA’s, the main focus of these will be ISA 240, this is the standard that covers fraud, and plays a large part in the way auditors do their statements. Throughout this essay we will be able to critically analyse what role the auditors play in the detection of fraud and what the public believe the auditors role is.
The purpose of an audit is to enhance of confidence in the financial statements. An auditors opinion validates this purpose.
Internal auditors cannot effectively provide an analysis on the company’s internal dealings as they are part of the company. External auditors, however, can observe these processes from the outside and then determine where the funds of the company and whether the dealings adhere to the regulations. Using external auditors in a company prevents conflict of interest from happening. Conflict of interest is a situation where an individual or organization has multiple interests and of those multiple interests, one could possible corrupt the motivation for an act on the other when the auditor has any kind of beneficial interest in their client’s performance. In other circumstances, there is also the threat of familiarity where auditors become
1) Internal Auditors are expected to add value to the organization through improved operational effectiveness. In addition, their responsibilities include all the following except:
The role of internal audit is to provide independent declaration that an organization’s threatadministration, governance and internal control processes are functioning effectively. Internal auditors deal with concerns that are essentially important to the existence and success of any organization. Unlike external auditors, they aspect beyond financial possibilities and statements to reflect wider problems such as the organization’s reputation, development, its power on the location and the approach it treats its organizations.In summary, internal accountantssupport organizations to thrive.
| The basic objective of the external audit is to enable the audit to express an opinion on the financial statement.
According to the Institute of Internal Auditors (IIA), (2011), the internal auditing is a team of consultants, a department and a division or other practitioner which independent, have objective assurance and conduct a consulting activity which is designed to add value and improve the organization operations. The internal auditor can help an organization in achieving its objectives by bringing a discipline and systematic approach in order to improve and evaluate the effectiveness of risk management, control and governance process.