Why Auditors Fail To Detect Fraud

Overview

Prior to the original SAS No. 82 on Consideration of Fraud In A Financial Statement Audit (now codified as SAS No. 122, AU 240), the word fraud never appeared in a single SAS, nor was it described anywhere.  SAS No. 82 stated that auditors failed to detect fraud for two reasons:  1) They did not know what it looked like and 2) They had not been trained to look for it.  Although the SASs did not provide any guidance, auditors have always been responsible for the detection of anything that would cause a material misstatement of the financial statements whether caused by error or irregularities.  (They would not even say the word fraud until it appeared in SAS No. 82) The standards were replete with guidance on the detection of an error but silent on how to detect irregularities.  Now auditors are required to document in every financial statement audit their process of determining the risk of financial misstatement due to fraud.

This presentation is designed to focus on frauds that were missed by the auditors and, in some cases, why it was missed.  There will also be discussion as to what the auditor must do in order to improve their track record on detecting fraud.  As reported on the Association of Certified Fraud Examiners Occupational Fraud 2022: A Report to the Nations, only 4% of frauds were initially discovered by the external auditor.  It was reported that more frauds were discovered by accident, (5%) then was discovered by the external auditor.

Prerequisites

None

Objectives

• Understanding the importance of developing and maintaining professional skepticism
• Evaluating the Tone At the Top
• Determining intent
• Obtaining an in-depth knowledge of your client’s operations
• Recognizing red flags related to fraud
• Looking for what should be there
• Looking for what should not be there
• Identifying unusual transactions

Highlights

• Reasons auditors fail to detect fraud
• Willful Ignorance
• SAS No. 82
• Additional documentation
• How and who to talk to
• Determining the Tone At the Top
• How to Determining Intent
• If you expect it, you will see it