Managing Fraud Risk: A Practical Guide for Directors and Managers

Limitations of Traditional Audit Techniques

Many companies place too much reliance on audit as a key control against fraud. Directors and managers need to appreciate that traditional audit techniques are of limited effectiveness in preventing and detecting fraud. There are two main reasons for this, discussed below.

Poor Understanding of Fraud Risk

The first reason is quite simple and relates to the basic fraud equation. As we have seen, fraud results from a combination of motive and opportunity. Traditional auditing looks at half of this equation only, whilst largely ignoring the other half. Opportunity is certainly examined through audit review, analysis and testing of internal controls. However, in most audits the possible motives of fraudsters are simply not focused on at all. This is a serious weakness and it means that behavioural “red flags” and other warning signs that might point to the existence of fraud will often be missed as a result.

Internal auditors certainly need to be aware of the various pressures and motives that can lead to fraud. As we have seen, the IIA specifically states that they should have sufficient knowledge to identify indicators of fraud. As we saw in Chapter 3, there are many reasons why people commit fraud but the research of criminologists like Dr Cressey conclude that some of these are more important than others. It is essential that auditors are aware of the Fraud Triangle and other key pieces of research that are set out in that Chapter in ...