Responsibility of Auditors to Detect Fraud

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Fraud in societies as well as in organizations has gone to the highest pedigree such that researchers have seen it as a threatening issue and thus worth researching on. The researchers in sociology are particularly interested in giving solutions to the several controversies that ensue in white-collar jobs as well as the boundaries that exist between various entrepreneurial notions. Still, they are increasingly becoming interested in activities that can be said to be fraudulent and the construction of the fraud attributable to the social aspect. The boundaries evident regarding both the formal as well as the informal economic activities can be said to connect putting into consideration the fraud and revenues realized from tax (Braiotta, Gazzaway & Colson 2010).

Fraud, in recent times, has arisen to become a major issue concerning the accounting profession. Consequently, the accounting practitioners, especially the auditors in the U.K as well as in other parts of the world have had embarrassments, which can be said to be very significant resulting from the failure to deliver. In most cases, it is that auditors tend to overlook fraud (Braiotta, Gazzaway & Colson 2010).

Accounting practices are governed by the international standards of accounting and as such, it has a quotation in regards to fraud. In the international Standards, fraud is addressed under SAS 110 whereby Fraud and Error are quoted. However, fraud is put in detail and as such, it is stipulated in the ISA 240 which indicates that an auditor has a responsibility imposed on him whereby he is responsible for the detection of fraud during the process of financial statements audit (Steve, Albrecht & Albrecht 2011).

Thesis Statement

The purpose of this paper is to access the current responsibilities of the auditors in the UK about fraud. In addition, the paper will also address how the auditor’s duties have in recent times changed (Vona 2011).


To better understand the responsibilities of the auditor regarding detection of fraud, one must familiarize himself with what determines fraud. In the same aspect, one must establish why error arises (Rittenberg, Johnstone & Gramling 2011).

What is accounting fraud?

According to ISA 240, fraud can be said to be any act that is intended by one or several persons within the management of an organization. As such, it arises from those individuals who have the responsibility to govern the organization, the employees, or even the third parties whereby, they use deceptive measures to obtain an advantage referenced as illegal or unjust (Busch 2012). On the other hand, an error can be said to be an intended misstatement regarding the statements of finance and this should include the omissions or disclosure of an amount (Busch 2012).

According to the two definitions, misstatements often seen in the statements of finance arise due to errors and fraud. The auditor ought to observe extreme carefulness in an effort towards ensuring that those misstatements are classified correctly. Fraud in accounting is a general term but in it, management and employee fraud are entailed. The former refers to the fraud arising and caused by one or more individuals who have been mandated to govern the organization (Zack 2009).

Concerning employee fraud, it is the one caused by people not within the management team. Moreover, there is another fraud aspect in the name of manipulation of the statements of finance (Vona 2008). As such, the persons preparing them intentionally amends them to ensure that a higher or a lower level of earning is achieved and that the earning has occurred. In most cases, this is aimed at reducing the degree of organizational gearing so that the company can adhere or comply with the agreements regarding any loans that have been advanced to the institution by their financiers (Vona 2008).

The audit practitioner is usually mandated with the responsibility to develop plans and later implement those plans by ensuring the performance of the audit in an effort towards obtaining assurance which can be referred to as reasonable regarding whether the statements of finance has an aspect of material misstatement or not and more still, to whether caused by fraud or error (Singleton & Singleton 2010). In the contemporary world, the auditor has had to put fraud into consideration in every stage entailed in the process of auditing. As such, then consideration ought to be exclusively blended and made to be part of the process of audit and as such, it must be updated often as long as the audit has not been completed (Pickett 2011).

Even though the public has always been constantly expectant that fraud is uncovered by the auditors, it is said that the auditors are not supposed to be charged with the duties involving the detection of fraud. The most appropriate reason for this is because; the reliance is in most cases is referred to the management such that they provide all the necessary documentation as well as the relevant information (Matt, 2005).

About this, it is said that small-scale fraud is the most difficult type of fraud that can be detected. The difficulty of detection of the small scale fraud is further enhancer particularly if it has been forged through by several key staff within the management of the organization. An auditor is mandated with the responsibility of detection and thus reporting any material misstatements within the financial statements arising out of fraud (Crumbley & Zabihollah 2004).

An auditor is required to ensure that he employs the forty-one risk factor which has a strong relationship with fraudulent reporting of the financial statements. Moreover, the forty-one risk factor has a relationship with abuse in regards to the use of assets whereby they have been misappropriated during which time the auditing plans were being designed (Wang, Winton & Yu 2001). Furthermore, the auditing plans must be continuously modified during and in the course of the auditing process. As such, the basis for this modification should be the gathered information regarding the underlying factors (Crumbley & Zabihollah 2004).

However, auditors ought to maintain the use of judgment that is subjective aiming at analyzing the numerous risk factors. For instance, the auditors need to access the display of a noticeable disregard of the regulatory authorities by the management (Ramos 2009). According to the International Auditing Standards, the responsibility placed on the auditor necessitates him to assume the cognizance and as such, he should report matters as he has experience or has come to note in the course of the auditing process. As such, these matters should be the ones relating to the compliance with the requirements of the regulatory authority, adequacy associated with accounting and control systems as well as projects and programs (Hicks & Goo 2008).

In recent times, there has been an emergence of a view that auditors ought to play a central and direct role in efforts towards the establishment of viable governance if the borders associated with genuine functions of the auditing process are to be established. Such a situation would be regarded as catapulting the string further away without achieving anything substantial or positive (Paul, Singh & Winton 2006). The most effective and the only alternative is to find ways in which the auditors will be more consociated and more dutiful and as such, they will become more effective. The effectiveness will be enhanced further by the fact that the auditors are intentionally restricting themselves within the boundaries of terms of reference (Trenerry 2009).

Detection of fraud as a responsibility of the U.K auditors

As explained by the PCAOB

In recent years, the auditing profession in the United Kingdom has indeed made an initiative to attempt to close the gap between the expectations of the investors and what the auditors do. For example, in May 2009, the U.K’s center for audit quality, which is the organized group of trade specifically for the audit trade, printed and issued out brochures regarding the accounting of any public organization? In it, it was held out that the auditors should take into account the areas that can be said to show a potential of misconduct concerning a particular company during which process will define the areas worth reviewing (Trenerry 2009).

However, the center for audit quality did issue out a caution that since auditors develop a tendency whereby they don’t put examination of every transaction as well as event into a stern consideration, then there can never be a guarantee that all misstatements that can be said to be material will be detected (Constantin 2009). This is regarding whether encompassed in an error or even fraud.

In recent times, the U.K’s PCAOB has been putting efforts in attempting to close the gap and as such, they are guided by a recommendation stipulated by the U.K’s department of treasury, which was made in the year 2009 whereby, the department appointed a group of advisors who were mandated with the responsibility of studying the auditing industry (Chau & How-yuen 2010). According to the findings of the group, an audit report is the sole basis by which communication between United Kingdom auditors as well as the investors regarding a particular organization is done. The group also asserted that the audit report has the responsibility of explaining the role of auditors and the set limitations about the detection of fraud (Hicks & Goo 2008).

About the above recommendations, it can be said to be a clarification, which observers of the undertakings of the group of advisors continuously demand. As such, they say that if the establishment of those material errors as well as fraud can not be taken as the biggest issue regarding the auditing industry, then there is no clarification of what services the audit practitioners offer to the investors as well as to the U.K’s capital markets that are additive to the value (Rodgers 2012).

According to the PCAOB, the United Kingdom practitioners must provide an aspect of a reasonable assurance such that the statements of finance that the auditors have gone through and made a review do not encompass material misstatements regardless of the cause of fraud or error (Jere & Wang 2005). However, in reality, the language adopted to buy the UK auditors about their reports seemingly fails to match the text when the rule is put into consideration. For instance, in the year 2010, a meeting was held and in that meeting, the PCAOB asserted that the audit reports ought to be revised and as such, they include the statement ‘regardless of the cause, fraud or error’. As such, it will be effective in indicating that the audit practitioners indeed have a responsibility of a certain degree concerning the identification of fraud (Gupta, 2004).

The responsibility: A possibility of a shift

About the year 2008, Public companies in the United Kingdom were mandated with the requirement that they should not only prepare statements of finance but also issue them and as such, these financial statements should indeed reflect the performance of those companies. According to the U.K’s treasury, companies ought to have their financial statements be prepared by an independent investor (Gupta 2004).

The audit practitioner overall approach: Detection of the financial fraud

Auditing procedures are dynamic in that they change in nature, extent as well as timing, and this is better explained by the AU in section 316.52. As such, these procedures are necessary to address the identified risks regarding the material misstatements arising out of fraud (Murphy 2008). Again, looking at the PCAOB, these changes are described as:

The nature of procedures used in auditing

The nature may be such that it may require an auditor to gather appropriate evidence whereby it has an aspect of reliability and can be easily verified. For instance, techniques used in the auditing process, which are computer-based, might be such that they provide proof concerning the accounts that are in nature significant. Regarding this proof, it should be collaborative (Simi & Philippon 2005).

Timing of substantive tests

The timing of these tests ought to be adjusted in the right way. For instance, it may be that the substantive test is such that they are of a particular value in respect to the access of risks regarding the material misstatements resulting from fraud during the reporting day or just before the reporting day (Fred & Lawarrée 2001).

The extent of auditing procedures

The greater extent of any auditing system used has to show any assessment of a given risk assessment in respect to the bits and pieces misstatements arising out of fraud. For instance, it is essential and appropriate if the sample size was increased. The major concern of the PCAOB was the fact that the auditors have a tendency whereby they obtain an assurance, which can be said to be reasonable regarding the reduction of risk. They perform this act by checking off an item within the programs associated with the standard audit as well as checklists.

Insufficient financial credentials are responsible for the obscurity faced by the superior most members of the audit team such that they can not adequately or properly review the procedures presumed by other audit industry practitioners. Moreover, the PCAOB has inspection teams and according to their recent report, it is a great concern that the procedures used in auditing have indeed been used incorporating the mechanical aspect, that is, they are being used mechanically. As such, they should not be used mechanically but instead, they should be facilitated by a designed audit plan which has been modified to be by the detection of risks (Lanza & Rollins 2000).

The response of the Auditor to factors associated with fraud risk

This is described in the AU section 316.48 whereby, the response is about material misstatements arising out of fraud. The description is in the following aspect:

A response has an overall effect regarding how the audit is conducted

As such, this is a response that involves considerations, which are in nature more generalized excluding the procedures that are more specific and which were not part of the original plan (Clifford & Stulz 2004).

Response to identified risks

This is a kind of response regarding the identifiable risks, which involve several aspects. This includes the nature, the timing as well as the extent to which the procedures involved in the auditing process are performed (Pagano 2006). Another response is the one that involves the performance of some procedures which can be said to further address the issue of risk as related to material misstatements arising out of fraud, which involves the management. As such, the management tends to override the controls, given the ways, which entail unpredictability and which facilitate the occurrence of this overriding (Ricchiute 2005).


From this analysis, it is evident that the primary responsibility regarding the detection of fraud as well as its prevention lies with the individuals charged with an entity’s governance as well as with the management. As such, this can be best achieved if such measures as deterrence of fraud prevention, facilitation of fraud detection, and thereby a swift punishment of the perpetrators of fraud if at all it occurs (Wang, Winton and Yu 2011). The audit practitioner, who conforms to the United Kingdom standards of audit, ought to obtain an assurance that is regarded as reasonable that the statements of finance assumed do not encompass material misstatements regardless of the cause, that is, whether arising out of fraud or as a result of an error (Financial Times 2012).

In the contemporary world, not only in the United Kingdom but also in various parts of the world, there is a high profile failure by organizations, and this is supposed to mean that it is the audit practitioners that do suffer the most when things in an organization turn out for the worst (Karl 2002). In respect to frauds to the organizations as well as the offenders, strategies must be developed and put in place to ensure that organizational fraud is detected and prevented.


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