Potential Red Flags and Fraud Detection Techniques
As noted in earlier chapters, management is responsible for the quality of financial statements and an organization's internal control structure. Statement of Auditing Standards (SAS) No. 1 states this: “Management is responsible for adopting sound accounting policies and for establishing and maintaining internal control that will initiate, record, process, and report transactions consistent with management's assertions embodied in the financial statements.” Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 require certifications by members of management as to the completeness and accuracy of financial reports and the nature and effectiveness of internal controls. Management is also responsible for establishing and maintaining proper compliance systems, which is beginning to be reflected in regulatory initiatives in the enforcement and legislative communities of both the United Kingdom and the United States.
The accounting literature about the auditor's role in fraud detection is extensive. At its core it states, “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” SAS 99 and AU Section 316, Consideration of Fraud in a Financial Statement Audit, are the current standards on this topic and are discussed throughout this chapter. Related ...