Introduction
The primary objective of auditing work is to enable an auditor to ascertain whether the financial statements give a true and fair view of the company’s performance at a particular date. However, auditors have an incidental objective of detection and prevention of errors and frauds.
The auditor should perform certain audit procedures to ascertain the accuracy and validity of transactions and balances as reflected in financial statements. For instance, an auditor should compare accounting practices adopted in different accounting periods and cases of inconsistency, obtain an explanation from the management. In addition, the auditor should compare financial statements covering different accounting periods and note any material differences in each class of items. To ascertain the correct outstanding balances of debtors and creditors, the auditor should carry out debtors’ and creditors’ circularization respectively. The auditor should still check the accuracy and reasonableness of provisions for bad and doubtful debts. The accuracy of this provision can be ascertained by re-performing calculations of various transactions in debtors’ ledger. The auditor should evaluate various valuation methods used in the valuation of fictitious assets and ascertain the suitability of the accounting policy used in recording them.
Corporate employees to blow the whistle on a fraudulent scheme within an organization
Employees should be allowed to make several presentations of their input in the preparation of financial statements to the auditor. The current practice allows only management staff to interact with auditors. It is no doubt that managers can manipulate financial information because they are the same people that set accounting policies that are applied in the preparation of financial statements. Financial statements are a clear depiction of the efficiency of management staff in decision making and therefore managers can misapply certain policies to give a better impression of the company’s performance (Mahany, 2009). On the other hand, it is unlikely that employees can manipulate financial information because they are rarely involved in the final preparation of financial statements.
Managers should also communicate to the employees about various decisions that they make concerning the company. These decisions may be both long–term and short-term and provide a platform upon which employees evaluate the quality of various decisions made.
Reward of ethical behavior
Businesses that pay key attention to their employees’ ethical behavior are subjected to a lower risk of financial malpractices. Employees and executives, who observe high ethical standards, are less likely to involve themselves in frauds and wasteful practices but instead remain focused on the achievement of the goals of the company. Rewarding employees based on ethical standards is one way of motivating them hence reducing their involvement in fraudulent activities. Through motivation, employees also work diligently and minimize errors in their works (Strayer University, 2010).
The accounting profession requires accountants and auditors to behave ethically. This helps in the achievement of high standards of work and safeguards independence throughout the auditing work. To a large extent, ethical standards reduce the risk of professional negligence.
Measures accounting firms can take to reduce the effect of personal relationships on the quality of an audit
Generally, auditors face four main types of independence risks namely, self-review advocacy, intimidation, and familiarity. To avoid these types of risks auditors should do the following; to start with, avoid undertaking both assurance and non-assurance engagements of the same client. This means that an auditor should avoid performing services for an assurance client that directly affects the auditing work.
In addition, an auditor should avoid involving a close family member of an influential staff of an assurance client in the audit engagement. Also, an auditor should not assign any work to a former employee of an assurance client. It is also imperative that auditors should restrain from receiving gifts from employees of an assurance client (Mahany, 2009). Moreover, the terms and conditions of an auditor should be well stipulated in the assurance engagement letter to avoid the threat of firing from the management of the assurance client.
Accounting professional’s responsibility to the company’s shareholders when fraud is discovered
Auditors have a primary responsibility to protect the interests of the persons who appointed them otherwise, they risk facing legal liabilities. Auditors are ordinarily appointed by shareholders to act as watchdogs over shareholders’ assets and therefore any breach of duty may result in both criminal and civil liabilities. In this respect, auditors are charged with the responsibility of providing reasonable assurance that the financial statements are free from errors or frauds (Shortsleeve, 2009). An auditor must consider whether the existence of fraud affects the true and fair view of the company’s performance. If the detected fraud is not enough to affect the true and fair view of the company’s performance, the auditor should report the matter to the management. On the other hand, if the auditor detects frauds that are likely to affect the true and fair view of the company’s financial performance, he should qualify the audit report. In this case, the auditor might also consider obtaining a letter of representation from the management which details the role of management in the detection and prevention of fraud.
Conclusion
Auditing primarily helps in safeguarding the company’s assets. However, it is unlikely that auditing will cover all transactions of a company because it is impractical to audit all transactions due to the bulkiness of the work. In most cases, statistical sampling techniques are used to select items to be audited. This procedure leaves a sizeable number of transactions un-audited but whose inferences are included in the audit report. Therefore, due to the inherent limitations in auditing, it is unlikely that any audit work would guarantee an absolute level of assurance.
References
Mahany, B. (2009). What’s your fraud IQ?. Journal of Accountancy, 208(3), 48-51.
Shortsleeve, T. (2009). An efficient profit motive. Journal of Accountancy, 207(6), 28.
Strayer University (2010). ACC 599: Graduate accounting capstone. Mason, OH: Cengage Learning Custom.