Audit Research Report

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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 - 6 |
5| Inherent Limitations of Audits| 6 - 7|
6| Factors of Consideration| 7 - 8|
7| Conclusion | 9|
| References| 10 - 11|

1. INTRODUCTION

Auditing is a profession which society relies on to add credibility to financial statements. Due to factors beyond the control of users of financial statements, they are unable to verify the reliabiliy of information in financial statements themselves. Therefore they require auditors, as independent professionals, to do so on their behalf. The responsibilities that auditors have are defined mainly through legislation and regulations put in place by national jurisdictions and professional accounting bodies. Consequently this results in legal liabilities for auditors which is how their responsibility is enforced. The current level of responsibility will be examined later in the report.

Standard-setters face a difficult decision when deciding on the appropriate level of responsibility. Any change could lead to numerous possible implications. As such the aim of this report is not to recommend an appropriate level, but to identify the factors that should be of consideration when deciding on the appropriate level.

2. LITERATURE REVIEW

This report looks at the auditor’s responsibility to detect fraud in the international context. Therefore the widely-used International Standards on Auditing (ISAs) were chosen as the basis from which to conduct research. ISAs set out auditors’ obligations and are currently adopted by or used as the basis of national standards for 126 jurisdictions around the world (International Federation of Accountants, 2011).

The review of literature shows that fraud can have different definitions, but this report is concerned with fraud which results in material misstatement(s) in financial statements. Fraud is defined in International Standard on Auditing (ISA) 240 as ‘An intentional act by one or more individuals among management, those charged with governance,...
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