Tímarit um endurskoðun og reikningshald - 01.01.1976, Side 48

cerning the selection and application of
accounting principles or estimates of fu-
ture events, which may also be affected
by the natural bias that accompanies deci-
sions committing resources of the com-
pany to future use.
The auditor does not accept manage-
ment’s representations concerning such
matters without question, but he does
not automatically suspect fraud because
of the discretion that naturally accompa-
nies top management’s position in the
organization. The circumstances that
would cause the auditor to suspect deli-
berate misrepresentations by management
are conditioned by the state of mind with
which he approaches the examination.
The independent auditor does not app-
roach the ordinary examination with the
attitude that it is impossible that top
management may be involved in frau-
dulent activities. On the other hand, he
does not conduct the audit with that
suspicion in his mind. The basic
assumption in the ordinary examination
is that there is no necessary conflict of in-
terest between the auditor and the man-
agement of an entity under audit.
The assumtion of the honesty of man-
agement, in the absence of evidence to
the contraiy', has received support in the
courts. Justice Moffit (Pacific Acceptan-
cej has observed: “. . . In the case of a
finance company [with] a branch office,
. . . the auditor does not conduct the au-
dit with suspicion in his mind that the
branch manager has been negligent or
fraudulent.. ., yet equally he does not
undertake the audit on the basis that
there is no possibility that the branch ma-
nager has acted beyond his authority, or
negligently, or has been party to some
fraudulent or irregular dealing.”
The specific conditions that would ma-
ke the auditor suspect deliberate man-
agement misrepresentations also would
depend on the circumstances of a parti-
cular case. However, circumstances such
as a management dominated by one or a
few individuals or a company with acc-
ounting and financial functions that appe-
ar to be understaffed resulting in constant
crisis conditions should cause a heightened
awareness on the auditor’s part concer-
ning the possible existence of fraud Also,
a company may be operating under eco-
nomic conditions that motivate deliberate
management misrepresentations. For ex-
ample, a company in an industry that is
declining or is experiencing a large num-
ber of business failures or a company
that is expanding at an extremely rap-
id rate through new business or product
lines may provide a stimulus for impro-
per management conduct.
An audit cannot provide
absolute assurance
If the auditor suspects the existence of
fraud that could have a material effect
on the financial statements, he will ex-
tend his auditing procedures accordingly.
Nevertheless, an ordinary examination
cannot be relied on to assure the dis-
covery of either defalcations and similar
irregularities or deliberate management
misrepresentations. Even the most exten-
sive examination could not provide ab-
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