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Can your firm afford to let fraud go undetected?
Many companies are questioning how the Statement on Auditing Standards (SAS) No. 82, Consideration of Fraud in a Financial Statement Audit, will impact the audit. Those concerned about such issues should first consider the implications of fraud going undetected. Litigation costs and the loss of public confidence in both the auditor and the client can have devastating effects on the future operations of the auditor, the auditor's firm, and the client. This article provides readers with operational guidelines on SAS No. 82.
Clarification of Auditor's Responsibility for Detecting Fraud
The auditing profession has been under constant attack for perceived failure in carrying out its responsibility to detect fraud during financial statement audits. In order to clarify the auditor's responsibility to detect fraud, the Auditing Standards Board issued SAS No. 82 in February 1997. Has SAS No. 82 changed detection responsibility for the auditor? No-but for the first time, specific operational guidelines are provided.
SAS No. 82 provides specific performance measures that are intended to drive auditor performance. The goal is to strengthen the auditor's ability to fulfill his or her responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. As part of these guidelines, examples of fraud risk factors and documentation requirements are detailed in the Standard. What Kind of Fraudulent Acts Should Auditors be Concerned With and When Might Such Fraudulent Acts Arise?
According to SAS No. 82, two types of fraudulent misstatements are to be considered by the auditor during a financial statement audit: misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.
Various categories of risk factors and examples for each category have been identified in SAS No. 82 to provide auditors with guidance in applying the appropriate degree of professional skepticism to each audit. The categories of these risk factors are as follows:
Risk Factors Relating to Misstatements Arising From Fraudulent Financial Reporting
Management's characteristics and influence over the control environment;
Industry conditions;
Operating characteristics and financial stability.
Risk Factors Relating to Misstatements Arising From Misappropriation of Assets:
Susceptibility of assets to misappropriation;
Controls. (These involve the lack of...