NEWSLETTER
Common GAAS Mistakes
Generally accepted auditing standards ("GAAS") cover the audit procedures required to be followed by auditors. In practice, however, GAAS is sometimes not followed during the course of an audit and auditors make mistakes. At the 2004 conference hosted by the Association of Certified Fraud Examiners, one of the topics was common mistakes auditors have made relative to auditing and financial statement fraud. We have listed some of them below.
· There is a shortage of experienced fraud auditors employed by auditing firms and, therefore, the required experience is often absent from audit engagement teams.
· There is often untimely and/or inadequate supervision and review of audit work by senior personnel.
· The work of audit partners is not being adequately reviewed (i.e., little to no concurring or second partner review).
· There is a tendency to be too dependent on checklists completed by lower level staff for testing financial statement fraud.
· Auditors have provided technical advice on major transactions and then audited such transaction dependent on the auditor’s advice (i.e., the auditor audited his own work).
· Inappropriate reliance on management representations without objective verification by the auditor.
· Failure to properly identify and test related party transactions.
· Failure to prepare and maintain adequate working papers.
According to a study by W. Steve Albrecht, Ph.D., CFE, CPA, CIA, for every $1 of fraud related financial statement loss, there is a market value loss to the audited entity of 500 to 1,000 times this amount. In other words, for a $1 million fraud loss, the market capitalization of a publicly traded company falls $1 billion.
The Expanding Role of the Forensic Accountant
Forensic accountants have been utilized significantly in the past two years by audit committees of publicly traded companies in complying with the Sarbanes-Oxley Act of 2002. The AICPA recently issued a discussion memorandum describing the expanding role of the forensic accountant in the ongoing fight against corporate fraud and audit failures. According to the AICPA’s Forensic and Litigation Services Committee (FLS), forensic accounting includes litigation services utilizing the CPA as an expert or consultant and investigative services involving the application of special skills in accounting, auditing, finance and quantitative methods.
Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit, provides guidance for the detection of material financial misstatements, whether caused by fraud or error. However, from a practical standpoint, auditing procedures are often limited in the scope of detecting corporate fraud and illegal acts and auditors are not extensively trained as fraud investigators. Forensic accountants bring additional expertise and objectivity and are often separately engaged by the audit committee. An increased application of forensic procedures may assist the CPA profession to bridge the "expectation gap" with regulators, the courts, and the general public by increasing the likelihood of uncovering material fraud.
The discussion memorandum suggested that "audit committee members may want an outside forensic accountant to complete an in-depth investigation in certain audit risk areas. The work of the audit committee, performed with the assistance of forensic accountants, may also provide comfort for the chief executive officer and chief financial officer, who are required to file certifications under Sarbanes-Oxley." The FLS is in the process of developing additional guidance to assist forensic accountants, audit committees and others who may use the services of the forensic accountant.
Increased Expectations for Detection of Fraud for Review Engagements
Statement on Standards for Accounting and Review Services (SSARS) No. 10, Performance of Review Engagements, sets forth additional expectations regarding an auditor’s responsibility to detect fraud in connection with reviews of financial statements. Reviews are a level of attestation service just below an audit and are commonly provided to sureties by construction companies. SSARS No. 10, which amends SSARS No. 1, requires the auditor to make specific inquiries of management as to their knowledge of potential fraud by management or others which could have a material effect on the financial statements. This information must be included in the management representation letter along with management’s acknowledgement of its responsibility to prevent and detect fraud. An overall awareness as to potential opportunities for fraud along with professional skepticism will be much more important to auditors in performing reviews of financial statements under the new standard which applies to reviews ending on or after December 15, 2004.
This appears to be another example of how regulators are emphasizing the importance of professional skepticism and having an awareness of the potential for fraud in the performance of attest services. We believe this and other similar standards are part of the continued effort by the regulators to bridge the "expectation gap" between what the public expects of accountants/auditors and what the accountants/auditors believe their responsibilities are for attest engagements.
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