Fraud: Evaluation and Communication

Question 1

Near the end of the audit, what should the auditors consider with respect evaluation of the audit results and material misstatements?

Answer 1

The auditor should consider such misstatements might be indicative of fraud.

Question 2

If the misstatement is the result (or may be) the result of fraud, and the effect could be material to the financial statements, the auditors should:

Answer 2

1) Discuss with appropriate level of management (one level above where we think the fraud occurred)
2) Consider implications to management integrity & audit
3) Gather additional evidence as to the facts

Question 3

Fraud is required for documentation, what should be included?

Answer 3

1) Discussion among engagement personnel
2) Produces performed as a basis for assessing risks of material fraud
3) Specific risks of fraud identified (and how the audit program responded to those risk factors)
4) Basis for auditors conclusion if improper revenue recognition is not identified as fraud risk
5) Results of procedures performed to address risk of management override of internal control
6) Document conditions/analytical procedures that caused us to perform follow-up procedures
7) Nature of communications to management, those charged with governance, and/or others

Question 4

When a auditor detects fraud, what are the required communications?

Answer 4

1) When senior management is involved (immaterial or material): must inform those charged with governance
2) Management not involved (not material): communicate one level above where fraud occurred

Auditors should adhere to confidentiality, however there are exceptions:

• Valid subpoena has been issued
• Must comply with SEC requirements (8-K)
• When authorized to communicate with the successor auditor
• When authorized to communicate with the successor auditor
• As required by government auditing standards