Question

As discussed in the video introduction, accounting fraud in large public companies has produced its fair share of major news headlines over the past 20 years. Even though laws like Sarbanes Oxley have been put in place to minimize the opportunity for financial fraud, the threat is still real in today’s corporate environment.

Imagine you have been hired to oversee the financial audit of a major company in your city. During the audit, one of the company’s employees has disclosed a potential fraud situation involving an accounting department supervisor.

• In addition to alerting your own manager about the situation, which one of the following options below would you choose to perform next as you proceed with your investigation? Only choose one.
  • Option A: Gather additional information by interviewing other company employees.
  • Option B: Meet with other members of the management team to discuss the company’s current internal controls for preventing fraud.
• Why do you feel your choice would be most effective?
• Discuss the reasoning for your selection.

Answer 1

Option B will be the most effective choice as an auditor

Reasons for choosing option B

SA 240 – The Auditor’s Responsibility Relating to Fraud In An Audit Of Financial Statements.

The best way to protect your business is proactive action. Put a range of internal and external controls in place, creating a “fraud limiting baseline,” ensuring that bases are covered.

Essentially, there are two basic types of internal controls, physical and functional.

• Physical Controls: Designed to put physical barriers in place that prevent access to cash, records, or other accounting data that can be used to conceal fraud.
• Functional controls: Designed to prevent and detect fraud, including activities like separation of duties, approving payments, and authorizing transactions.

Here’s a quick list of physical and functional controls that are fairly easy to put in place and offer business-protection dividends over the long term:

• Review your accounts every day and question exception items immediately
• Institute dual controls (procedures whereby the active involvement of two people is required to complete a specified process) and a separation of duties for payment processes
• Purchase insurance coverage to minimize risk
  • Discuss cyber theft protection with your insurance provider to determine if it makes sense for your organization
• Never send financial information using regular email, which is unsecure and easily compromised
• Educate employees about fraud risks and how to avoid threats (the Association for Financial Professionals offers excellent risk management and cybersecurity resources)
• Set strict password criteria •Regularly review your privacy policies and delete sensitive, unneeded client information
• Restrict company network access for payments to only company issued PCs or Laptops
• Lock desk drawers and file cabinets that contain sensitive information

In addition, your bank is there to help with security issues.

• Review your bank account and service agreements, as they include both customer protections and responsibilities.
• If you suspect fraudulent activity on your account, possible compromised credentials, a stolen device or cards, etc., immediately notify your banker. The sooner they know of an issue, the faster they can act to help resolve it.
• Build a relationship with your bank contact so they’re familiar with your business’ needs.

Should the need for action arise, you’ll be in a better position to respond after leveraging control procedures and the knowledge of financial partners.

Auditors duties

The auditor should meet the management and should discuss about the matters of internal control

Weak internal control leads to material misstatement hence if an auditor comes to know about the weakness of internal control he should give the suggestion to the management to adopt strong internal control.As strong internal control detects & prevent frauds errors

Conclusion :- seeing the above reasons it is clear that the auditor should choose option B as prevention is better than cure