Tímarit um endurskoðun og reikningshald - 01.01.1976, Blaðsíða 45

Consideration of the possibility
of fraud in an audit
In planning his exmination, the auditor
considers the possibility that the financial
statements may be materially misstated as
a result of fraud. The amount and kinds
of evidential matter necessar)' to form an
opinion are matters the auditor determi-
nes by exercising his judgement as to the
materiality of possible errors or irregula-
rities, weaknesses in the internal control
system, the susceptibility of a given item
to conversion or misstatement and the
kinds and competence of evidential mat-
ter available. Auditing procedures may be
varied in their nature, timing and extent
in response to those factors.
In regard to the materiality of possible
irregularities, for example, frauds invol-
ving accounts receivable collections or
frauds involving overstatements of inven-
tory could be material, but those invol-
ving abstractions from a small imprest
petty cach fund would normally be of
little significance. Consideration of mate-
riality, however, focuses on the effect of
possible misstatements on the financial
statements and not the source of misstate-
ment. For example, in industrial and
merchandising companies, inventories are
usually af great importance to both fin-
ancial position and results of operations
and accordingly may require more at-
tention by the auditor than would the in-
ventories of a public utility company.
The susceptibility of an item to irre-
gularities and the need for more conclu-
sive evidential matter may also affect
the timing of auditing procedures for
one or a number of accounts. For examp-
le, cash transactions are more suscepti-
able to irregularities than inventories, and
the work undertaken on cash may have
to be carried out in a more conclusive
manner. The auditor also considers the
possible need for simultaneous examina-
tion of cash on hand and in banks, se-
curities owned, bank loans and other re-
lated items.
The independent auditor’s evaluation
of internal control has an important bea-
ring on the selection, timing and extent of
auditing procedures and significantly af-
fects the consideration given in the ordin-
ary examination to the possibility that fi-
nancial statements may be misstated as a
results of defalcations and similar irregu-
larities versus deliberate management
misrepresentations.
The approach to defalcations. The in-
dependent auditor does not actively se-
arch for defalcations and similar irregul-
arties. In the ordinary examination he at-
tains satisfaction that financial statements
are not inateriallv misstated as a result of
defalcations through his study and evalua-
tion of internal control. The auditor’s
evulation of accounting control focuses on
controls for preventing or detecting ma-
terial errors and irregularities in financial
statements. Errors are “unintentional mis-
takes” and irregularities are “defalcations
and intentional distortions of financial
statements.”
The independent auditor considers the
types of errors and irregluarities that
could occur and the control procedures
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