Audit Research Report

Evaluate the auditors’ current responsibility to detect corporate fraud. What factors should be of consideration when deciding on the appropriate level?

Prepared for
Professor Brenda Porter
Course Co-ordinator, BEA 2004 Auditing

Author
Ho Jian Hong, Shawn
BA (Hons) Accounting and Finance
University of Exeter

Tutor
Dr Amama Shaukat
Tutorial (Wednesday 11am)

Date
1st May 2011
EXECUTIVE SUMMARY

Corporate fraud is a problem within society that has been on an upward trend over the years. The problem is expected to continue to increase, due in part to growing financial markets and the lingering recession.

The auditor’s responsibility to detect corporate fraud has also been on a general upward trend over the years. Especially since the Enron scandal, auditors are now required to be more proactive in searching for fraud when performing an audit. This responsibility is defined in International Standards on Auditing and enforced through legislation in national jurisdictions.

This report identifies the factors that should be of consideration when deciding on the appropriate level of responsibility auditors’ should have to detect corporate fraud. There are various limitations inherent in audits that should be taken into account, as they hinder fraud detection which is why even though an audit may be performed properly not all fraud may necessarily be detected. Other factors that should be considered too include implications like: higher costs for businesses, a more intrusive audit, increased legal liabilities for auditors and less talent being attracted to the profession. Careful consideration has to be given as to whether it is equitable to all stakeholders to increase or decrease the level of responsibility auditors have to detect corporate fraud.

INDEX

SECTION | CONTENT | PAGE(S) | | Executive Summary | 2 | 1 | Introduction | 4 | 2 | Literature Review | 4 | 3 | Increasing Problem | 5 | 4 | Present Level of Responsibility | 5

References: Statistics show that fraud in the United Kingdom is on a general upward trend. Fraud cases exceeding £100,000 in the United Kingdom totalled £329 million in 2004, £837 million in 2006, and over £1.3 billion in 2010 (KPMG, 2006; Yirrell, 2007). 4. PRESENT LEVEL OF RESPONSIBILITY Since the fall of Enron in 2001, auditors have been required to be more proactive in searching for fraud when conducting an audit (Boynton, Johnson and Kell, 2005) 5.1 RELIANCE ON MANAGEMENT’S INTEGRITY An integral part of the audit process relies on explanations from the entity’s management (Auditing Practices Board, 1998) 5.2 SKILLFULNESS OF PERPETRATOR Ernst and Young (2000) identified that 82 per cent of corporate fraud is committed by employees Furthermore, responses from the business community indicate that imposing additional burdens on businesses in order to address the consequences of the wrongdoing of a few is undesirable (Auditing Practices Board, 1998). 6.3 INCREASED LEGAL LIABILITY FOR AUDITORS Auditors are concerned that increased responsibilities might expose them to greater risk of litigation (Auditing Practices Board, 1998) Auditing Practices Board, 1998. Fraud and Audit: choices for society. [online] Available at:<http://www.frc.org.uk/images/uploaded/documents/Fraud%20and%20Audit%20-%20Choices%20for%20Society%20_final_1.pdf> [Accessed 11 April 2011]. Beasley, M. and Jenkins, G., 2007. A Primer for Brainstorming Fraud Risks. [online] Available at:<http://clearspecs.com/joomla15/downloads/ClearSpecs50V01_Brainstorming%20Fraud%20Risks.pdf> [Accessed 11 April 2011]. Boynton, W., Johnson, R. and Kell, W., 2005. Assurance and the integrity of financial reporting Economy Watch, 2011. Financial market growth. [online] Available at:<http://www.economywatch.com/market/financial-market/growth.html> [Accessed 12 April 2011]. Ernst and Young, 2000. Fraud The Unmanaged Risk: An International Survey of the Effect of Fraud on Business. London: Ernst and Young. International Federation of Accountants, 2001. International Standard on Auditing 240: “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”. New York: IFAC. KPMG, 2006. Massive surge in fraud in 2005. [online] Available at:<http://www.kpmg.co.uk/news/detail> [Accessed 7 April 2011]. Porter, B., Simon, J., Hatherly, D., 2008. Principles of External Auditing. 3rd edition. Chichester: John Wiley & Sons, Ltd. Ramos, M., 2003. Auditors’ responsibility for fraud detection. Journal of Accountancy, Online Issues, pp.1-11.