Tímarit um endurskoðun og reikningshald - 01.01.1976, Blaðsíða 47

the potential material misstatement of fin-
ancial statements.
When the auditor suspects that fraud
might exist, he should consider the na-
ture of the possible fraud and its implica-
tions and inform the management level
that appears to be at least one level
above those involved. In the rare circum-
stances when the top level of manage-
ment is, or appears to be, involved in a
fraud the directors should be informed.
Not all matters reported to the board
need be revealed to the shareholders if the
best interests of the shareholders indicate
that the matter merely be reported to the
board.
The specific conditions that would ma-
ke the auditor suspect the existence of de-
liberate management misrepresentations
or defalcations and similar irregularites
depend on the circumstances.
If weaknesses in internal control indi-
cate potential errors or irregularities, the
auditor applies auditing procedures to ob-
tain evidential matter as to the validi-
ty and propriety of the relevant transac-
tions and balances. When material weak-
nesses in internal control exist, the audi-
tor requires more persuasive evidence as
to the validitv and propriety of the mat-
ters in question. The evidential matter
obtained may. however, lead the auditor
to suspect fraud. For example, a trial bal-
ance difference that cannot be located or
subsidiary ledgers that do not reconcile
with control accounts might arouse the
auditor’s suspicions, particularly when
they occur in combination with weak-
nesses in internal control. A pattern of
such occurrences not adequately explai-
ned should lead to suspicion of fraud.
The approacli to management misre-
presentations. Consideration of the possi-
bility of deliberate misrepresentations by
management at the top level in an org-
anization does not end with the evalua-
tion of internal control. Discretionary
authority for certain decisions must rest
ultimately with someone who is effective-
ly outside the scope of the internal cont-
rol system. Not all management positions
are vested with that degree of authority
and the auditor should consider the cir-
cumstances in each organization. Deter-
mining with certainty that management
has overridden internal control procedu-
res is not usually possible, but the audi-
tor should generally be able to evaluate
the risk by considering such factors as the
nature of the entity being audited, the
susceptibility of the item being examined
to misstatement, the extent of manage-
ment judgment in determining the item
being examined and prior experience with
the client.
The potential for management over-
ride of the internal control system does
not cause the auditor to suspect fraud ev-
en though it affects his selection of audi-
ting procedures. The auditor plans his
examination to test the judgments and
estimates that management makes in the
preparation of financial statements. He
obtains evidential matter concerning esti-
mates such as uncollectible receivables, in-
ventory obsolescence and liability under
product warranties. Those matters may
by affected by mistakes in judgment con-
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