LUTZ BUSINESS INSIGHTS
Why Auditors Require Face-to-Face Meetings to Assess Fraud Risks
Auditing standards require auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks. Here’s what auditors look for during fraud-risk interviews and why face-to-face meetings are essential.
Entities being audited sometimes feel fraud-related questions are probing and invasive, but they’re a critical part of the audit process. The AICPA requires auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit.
Specific areas of inquiry under AU-C Sec. 240 include:
- Whether management has knowledge of any actual, suspected or alleged fraud,
- Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
- The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
- Any specific fraud risks that management has identified or that have been brought to its attention,
- The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist, and
- Management’s communications, if any, to those charged with governance about its process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.
Fraud-related inquiries may also be made of those charged with governance, internal auditors and others within the entity. Examples of other people that an auditor might ask about fraud risks include the chief ethics officer, in-house legal counsel, and employees involved in initiating, processing, or recording complex or unusual transactions (and their supervisors).
So how does your auditor ensure that he or she gains as much fraud-related information as possible from fraud-risk interviews? During the planning stage of the audit, the audit partner meets with the audit team to brainstorm potential company- and industry-specific risks and to outline specific areas of inquiry and high-risk accounts.
Interviews must be conducted for every audit — auditors can’t just assume that fraud risks are the same as those that existed in the previous accounting period. While out in the field, auditors meet in person with managers and others to discuss fraud risks. Why? A large part of uncovering fraud involves picking up on nonverbal clues.
Nuances such as an interviewee’s tone and inflection, the speed at which he or she responds and body language provide important context to the words being spoken. In a face-to-face interview, the auditor can also observe signs of stress on the part of the interviewee in responding to the question, including long pauses before answering or starting answers over.
In addition, in-person interviews provide an opportunity for immediate follow-up questions. When it isn’t possible to have a face-to-face interview, a video conference or phone call is the next best option because it provides the auditor many of the same advantages as meeting in person.
It’s important for interviewees to be patient when answering the auditor’s questions. Auditors are trained to ask for clarification if an interviewee uses an unfamiliar word, rather than to assume its meaning or skip over the response. Dishonest people often use confusing language and appear edgy when they’re trying to intentionally conceal misconduct, including fraud.
Even when an audit is properly planned in accordance with the auditing standards, some dishonest behaviors may not be detected. It’s generally easier to find unintentional errors than to detect a material misstatement resulting from fraud. Fraud may involve sophisticated concealment schemes, such as:
- Deliberate failure to record transactions, or
- Intentional misrepresentations made to the auditor.
In addition, collusion between employees, suppliers and customers can make it harder for audit evidence to reveal fraud. The risk of the auditor not detecting a material misstatement is even greater when upper-level management is involved in the fraud scheme. That’s because top managers may have the opportunity to directly or indirectly manipulate accounting records, present fraudulent financial information or override control procedures designed to prevent similar frauds by other employees.
To catch a thief
Evaluating fraud risks is a critical part of your auditor’s responsibilities. You can facilitate this process by anticipating the types of questions your auditor will ask and the types of audit evidence that your auditor will need. Forthcoming and prompt responses help keep your audit on schedule and minimize any unnecessary delays.
©2018 THOMSON REUTERS
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