1. Learning Objectives LO6 Explain the auditing standards related to external, internal, and governmental auditors’ responsibilities to detect and report frauds, errors, irregularities, and illegal acts. LO7 Describe ways and means to prevent frauds. LO8 Explain the use of extended audit procedures for detecting fraud. LO9 Summarize how PAs can assist in prosecuting fraud perpetrators. 1

2. Auditor’s and Investigators’ Responsibilities External auditors’ responsibilities under GAAS are:  The auditor should document fraud risk factors identified as being present during the assessment process, and document the auditor’s response to any such factors.  The auditor should assess inherent and control risks so that the risk of undetected material misstatement from fraud or error is appropriately low. LO6 2

3. Auditors’ Responsibilities In conducting the audit, the auditor must presume a risk of fraudulent revenue recognition.  The presumption is “rebuttable.” If auditors can convince themselves that risk is low, the presumption is rejected.  Auditors must perform procedures and analysis to determine that the risk is actually low.  Fraud auditors may be used to assess this risk. LO6 3

4. Internal Auditors’ Responsibilities Internal auditors review the reliability and integrity of financial and operating information, review the systems established to ensure compliance, and review the means of safeguarding assets.  The internal auditor should have sufficient knowledge to identify indicators of fraud, but is not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud. LO6 4

5. Public Sector Auditors’ Responsibilities The requirements are to know the applicable laws, design the audit to detect abuse, and report to the proper level of authority.  Report should include all material instances of non-compliance and all instances of illegal acts that could result in criminal prosecution. LO6 5

6. Fraud Examiners’ Responsibilities Fraud examiners have the strongest spirit of fraud detection.  Assignments are begun with a reason to believe that fraud may have occurred.  Fraud examiners “think like crooks.” They look not for strengths of internal control systems, but weaknesses and how to get around systems of internal controls.  Fraud examiners have a lower threshold for materiality, and think of materiality as a cumulative amount, rather than an annual amount. LO6 6

7. The Art of Fraud Awareness Auditing Fraud examination work combines the expertise of auditors and criminal investigators.  Successes come from the following:  experience,  application of logic, and  the ability to see things that are not obvious. LO6 7