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Do Audits Uncover Fraud?

Monday, 8 April, 2019 - 10:00

Audits rarely detect fraud, although they do serve an important purpose and may prevent potential fraud. Independent audits only provide reasonable assurances that the financial statements are free from misrepresentations. The auditors cannot guarantee an organization is free from fraud even after they have conducted the audit of that organization.

An audit is a very specific type of financial engagement that is executed to determine whether a company’s financial statements are ‘reasonably stated’. While assessing fraud risk is part of those engagements, the procedures associated with most audits are not enough to root out and prove fraud.

Audits are not designed to detect fraud. The procedures aren’t likely to find fraud. The rules don’t require the auditors to detect fraud. There is a lot of judgement involved when auditing the books and records of the company. Auditors only test a very small number of transactions and they use their judgment in determining whether to ask more questions or require more documentation. But it’s a fact that someone must take the blame and its logical to blame the independent auditors especially when those doing the blaming don’t really understand what an audit is all about.

Most frauds are discovered as a result of a tip, according to the Association of Certified Fraud Examiners (ACFE). ACFE recommends educating employees to detect fraud as a key to preventing and detecting work place fraud although many organizations use audits as One of several anti-fraud controls. In addition, while independent audit may not prevent fraud, strong internal controls can help reduce the risk of theft and fraud.

Companies and their shareholders cannot and should not reply upon traditional audits to find fraud. If they do, they will likely end up disappointed. Companies must set up policies and procedures to prevent fraud. The company must properly monitor employees to make sure that transactions are properly authorized and recorded. The company must make sure that fraud isn’t occurring. Management is responsible for oversight of its employees and processes.

Author:  Mrs. Maria Michaelidou - Senior Manager, Audit and Assurance Services

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Baker Tilly Klitou and Partners Ltd