Tímarit um endurskoðun og reikningshald - 01.01.1976, Page 49

solute assurance concerning the absence
of fraud accomplished by collusion, for-
gery or unrecorded transactions. A parti-
cular fraud might involve all or some
combination of these methods. Of course,
the mere employment of these devices
does not automatically relieve the auditor
of responsbility. Even collusion may be so
obvious that the application of customa-
rv auditing procedures in the ordinary
examination would disclose the fraud.
Neverthless, the possibility of a cleverly
devised fraud using one or more of these
methods precludes absolute assurance
that an audit will detect fraud, even those
that result in material misstatement of
financial statements.
Thus, an audit could never be a guar-
antee of the absence of fraud, but, even
if it could, confining an audit to so limi-
ted an objective would be unwise. The
auditor’s basic objective is to perform
an examination sufficient to form an
opinion that financial statements are free
from material misstatement. Sources
of possible misstatement include: (1) err-
ors (unintentional mistakes in data pro-
cessing); (2) irregularities (defalcations
and intenional distortion of financial sta-
tements); (3) misapplication of generally
accepted accounting principles of measu-
rement; (4) misestimation of the outcome
of future events (unusual uncertainties);
and (5) inadequate disclosure.
The auditor’s approach to the examina-
tion does not and should not categori-
callv exclude any possible sources of
material misstatement. Most audit proce-
dures, however, are applicable to several
sources of misstatement. The auditor reli-
es on his study and evaluation of internal
control to identify potential errors and
irregularities. He modifies the nature, ti-
ming and extent of procedures to test for
errors possible with any system of inter-
nal control and errors and irregularities
permitted by weaknesses in a particular
system of internal control. Several factors
affect the auditor’s approach to the po-
tential for intentional distortion of the
financial statemens by management. If an
area is susceptible to override by manage-
ment, internal control is not relied on in
that area. I he auditor approaches the
e.xamination with professional skepticison,
but he does not assume that management
is dishonest unless his examination raises
that suspicion. If the auditor’s suspicion is
aroused, he extends his procedures. That
approach seems to be both reasonable and
practical.
Concluding remarks
I do not want to suggest, however, that
independent auditors should be compla-
cent about the present approach to de-
tection of fraud in an ordinary examina-
tion or that the auditing standards execu-
tive comittee jrlans to be complacent
about the description of the auditor’s re-
sponsbility in present pronouncements.
Areas requiring renewed attention by
practising auditors include attention in
the development of audit programs to (1)
identification of red flags—matters that
should affect the auditor’s approach if
encountered in a particular examination;
(2) recognition of common methods of
47