Fraud Risk Assessment Audit Procedures

Fraud Risk Assessment Audit Procedures

The auditor will perform the following audit procedure for risk assessment of fraud.

1.    Risk Assessment of Management

The auditor will inquire from the management about their risk assessment of fraud and effective control for prevention of misstatements, because the fraud prevention is primary responsibility of the management. If management has not made any risk assessment, this is an indication that poor control may in the organization due to lack of interest on management in risk assessment.

2.    Inquiry from Management About Fraud

Management can provide a detail information about the possibility of risk due to the fraud , especially expected fraud where employee are involved, however, management inquiry does not provide information about management frauds.

3.    Inquiry from Employee & Others

Auditor can get information from the employees, internal auditor, legal counsel and others about the possibilities of misstatement due to fraud.

4.    Inquiry from those responsible for Governance

Governance is responsible for monitoring and overseeing the performance of management and therefore auditor can get useful information about the competency and integrity of the management by making the inquiry from those who are responsible for Governance. It would also help auditor to understand the role and extent of governance activities.

5.    Other information

Other information may also provide auditor useful information about the risk of material misstatement due to fraud. These other information includes client retention documentation, experience with the client, other engagement performed for client.

6.    Existence of Risk Factors

There may be incentive or pressure to commit the fraud, this incentive or pressure is known as Risk factor for fraud. Example of risk factor include , bank requirement for financing, salary increment based on the financial performance etc.

Auditor Responsibility for fraud detection

Fraud detection responsibility

Fraud detection and prevention responsibility lies on the management. Management will place appropriate control within organization for the prevention and detection of fraud.

Frauds are more difficult to detect

Frauds are more difficult to detect because of the following reasons.

1)    Frauds are well planned

2)    Management are involved in frauds

3)    Transaction are not recorded in the books of accounts

4)    Transaction are misinterpreted to auditor

Can auditor detect fraud?

Yeah, auditor can detect fraud, however, the auditor ability to detect fraud depends

·         Skills of perpetrator

·         Frequency of fraud attempt

·         Amount of fraud

·         Position of the person

Auditor Responsibility for fraud detection

Auditor is responsible that financial statement are free from misstatement as whole, therefore, though auditor is not responsible for detection of fraud , but , still there is some responsibility lies on the shoulder of auditor. Due to inherent limitation of audit, auditor cannot detect all the material misstatement due to fraud or error.

Auditor is responsible for maintaining professional skepticism for following factor

a)    Management can override controls

b)    Management can manipulate record

c)    Control over preparation and maintenance of record

d)    Reliability of record

Reasons for Committing Fraud

Reasons for Committing Fraud

1.    High Competition

First reason to commit fraud may be high completion. For example due to high competition the profit margin has reduced, which has adversely affected the management performance. Therefore management would try to overstate the revenue.

2.    Decline Customer Demand

Decline in customer demand is another pressure to commit fraud. Again a decrease in demand would negatively affect the profits and management would try to overstate the profit by overstating the revenue or understating the costs.

3.    Operating losses

Third pressure for fraud commitment may be continuance operating losses. These losses are negatively affecting the market value of the entity and there is fair chance of liquidation, therefore management would try to hide these losses.

4.    Finance Arrangement

Fourth pressure to commit fraud is finance arrangement. Financial institution put some condition for financing, and organization may try to show such financial position to get finances.

5.     market expectation

Fifth reason for fraud may be market expectation about the financial result of the entity. Management would try to meet the market expectation by manipulating results.

6.    Management Financial interest

Sixth pressure for fraud may be the financial interest of the management. For example management has shareholding in the entity and profitability would raise the share price. Therefore management would overstate profitability.

7.    Management Self interest

Seventh pressure for fraud is management self interest in the entity results. For example management may be interested in high salary and bonuses, therefore management would overstate the profit.