Comparison of Audits vs Fraud Investigations Flashcards
Role of Auditor
Fair: Corncern is that FS stated fairlu in all material aspect
Detection: make appropriate efforts to detect material misstatements and misreps
Corrections: Cause mngmt to correct material misstatement b4 FS issues
Alerts: when necessary, alert users about reliance on statements
Role of Foreinsic Investigator
Concensus: Not concerned with reaching opinion on FS as a whole
Scope: Not concerned with gen opinion when determining scope of accounting procedures
Losses: Asses and measure losses to org and recommend corrective and preventative actions
Evidence: Concern arises from evidence of 5 Ws of known impropriety
Patrol vs. Detective
Auditor: patrol officer sits aside client comp looking at ops w/ less than complete view of everything going on
Detective: Examine the situation, question everyone with info, review relvant info, bring forensic resources together
Key Diffs btw audits and fraud investigations
Fraud investigations
* No Opinion on FS or IC
* Fact finders instead of reasonable assurance
* Materiality less important
* Trrigger is known
* Management representation heavily challenged
* Questions validity
* Each investigation unique
* Continious reporting, not periodic
* Serving client, not publc
* Attorney client and WP privilege
Areas of Management Judgement
Estimates: can cause material differences in FS, must be able to consider if estimates self serving
Accounting Choices: Reflect objectively and properly the impact of accounting choices –> should not be made solely accounting impact must have a business purpose
Management Override
Huge concern - mngmt responsible for effective internal contols so override hard to defeat
Auditor Independence before SOX
Accountants sacrificed auditor independent to obtain and maintain consulting
Investors did not believe auditors to be
* independent
* objective
* skeptical
* lacked confidence in the turhtfulness of the info dissemminated
Sox and Auditor Independence: Prohibited services to audit clients
- Book keping or services related to accounting for records of FS
- Fin info design and implemenetation
- Appraisal and Actuarial services
- Internal Audit outsourcing
- Human Resources Broker or dealer
- Legal services and expert services unrelated to the audit
- Any other service the PCAOB determines
SEC Reg of Forensic Accounting Services provided by Auditor
Unlawful for accountatn to provide expert opinions or other services to audit client for purpose of advocating audit client’s interest in litigation
What can the Audit firm do in terms of Forensic Accounting?
Not precluded from enlisting its own forensic investigators to:
1. Extend audit procedures
2. shadow the audit clients indep legal counsel and retained outside FA investigators, if engaged or
3. perform combination of two
- Auditors can investigate suspected illegal acts at request of committee, when no litigation or regulatory proceedings
When can there be no forensic accounting services probided to audit client?
Once there is an inquiry of a regulatory body or litigation - perceived to be expert services unless services begin before inquiry occurred (usually stop)
Rules for forensic Services to Non Audit Clients
Member shall maintain objectivity and integrity, shall be free of conflicts of interests, and shall not knowingly misrepresent facts or subordinate their judgement to others
Independence Standards for Nonattest Services
Not as strict, because in litigation the practitioner provides an expert opinion or consulting services and the opposing party has the opportunity to question the experts work - not relied on blindly
- indep not rq for litigation service engagements, but if it provides audit services, likely precluded from litigation services
Professional Skepticism
Essential for auditors to maintain proffesional skepticism at all time
- Attitude of Trust but Verify
How to Trust and Verify
Check for
- Completeness: recognize in correct period cutoff issues
- Accuracy: correctness and appropriateness of statements and accounts
- Validity: Determining whether tests yields desirable results with precision, reliability and relevance
What is the Loose Thread Theory?
In most frauds there are indications that could reveal nature of offense, although not total impact
- small and easily overlooked
- if unconvered may identify larger, material fraud
- professiona skepticism helps identify
Where are two mandatory areas of risk assessment?
- Revenue recognition - Auditors presume improper rev recog as a fraud risk unless evidence says otherwis
- Management Override of controls: Always fraud risk due to its unpredictability
