Auditing standards require auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks. Here are some answers to questions about what auditors assess when interviewing company personnel to evaluate potential fraud risks.
What’s on your auditor’s radar?
When planning audit fieldwork, your audit team meets to brainstorm potential company- and industry-specific risks and outline specific areas of inquiry and high-risk accounts. This sets the stage for inquiries during audit fieldwork. Entities being audited sometimes feel fraud-related questions are probing and invasive, but interviews must be conducted for every audit. Auditors can’t just assume that fraud risks are the same as those that existed in the previous accounting period.
Specific areas of inquiry under Clarified Statement on Auditing Standards Section 240, Consideration of Fraud in a Financial Statement Audit, include:
- Whether management has knowledge of any actual, suspected or alleged fraud,
- Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
- The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
- Any specific fraud risks that management has identified or that have been brought to its attention,
- The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist, and
- Management’s communications, if any, to those charged with governance about its process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.
Fraud-related inquiries may also be made of those charged with governance, internal auditors and others within the entity. Examples of other people that an auditor might ask about fraud risks include the chief ethics officer, in-house legal counsel, and employees involved in processing complex or unusual transactions.
Why are face-to-face meetings essential?
Whenever possible, auditors meet in person with managers and others to discuss fraud risks. That’s because a large part of uncovering fraud involves picking up on nonverbal clues.
Nuances such as an interviewee’s tone and inflection, speed of response, and body language provide important context to the spoken words. An auditor is also trained to notice signs of stress when an interviewee responds to questions, including long pauses before answering or starting answers over.
In addition, in-person interviews provide an opportunity for immediate follow-up questions. When a face-to-face interview isn’t possible, a videoconference or phone call is the next best option because it provides many of the same advantages as meeting in person.
How can you help the process?
While an external audit doesn’t provide an absolute guarantee against fraud, it’s a popular — and effective — antifraud control. You can facilitate the fraud risk assessment by anticipating the types of questions we’ll ask and the types of audit evidence we’ll need. Forthcoming, prompt responses help keep your audit on schedule and minimize unnecessary delays. Contact us for more information before audit fieldwork begins.
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