A Note on Fraud and the Auditors

Abstract

Fraud will normally involve misappropriation of assets. This would lead to ‘creative’ accounting to ‘cover-up’ for the missing assets. This implies the fraudelent financial statements will have misrepresentation. The clean audit opinion is an opinion that the financial statements are faithfully represented. Hence, the public view that auditors should detect fraud. Auditors are responsible for providing reasonable assurance that audited financial statements are free of material misstatements (due to fraud?). Nonetheless, prior research indicates that auditors detect relatively few significant frauds (Dyck et al. 2010, KPMG 2009). Asare et al (2015) developed a framework that identifies four general factors, and elements within each factor, that may inhibit auditor fraud detection. The four factors are (1) the audit process, (2) institutional forces, (3) auditor incentives and (4) auditor KTE. The audit process is the methodology employed to search for and detect fraud. The effectiveness of the
methodology is dependent on the three other factors in the framework. The factor labeled “institutional forces” includes the regulatory and legal environment. Auditor incentives include
the financial and retention pressures faced by the auditor (e.g., expected litigation costs, loss
of clients, etc.). Lastly, auditors’ KTE includes the auditors’ cumulative fraud knowledge and experience acquired through both formal and informal learning. (Asare et al page 65).