Auditing and Fraud: Auditors' Responsibility and the Fraud Triangle

This report delves into the critical responsibility of auditors in detecting fraud within financial statements. It emphasizes that auditors must assess financial statements based on relevant rules, regulations, and standards. The report highlights the importance of internal control evaluations and the use of sampling procedures to form opinions on financial statement quality. A key component of the report is the discussion of the 'Fraud Triangle,' which includes incentive, opportunity, and attitude as indicators of potential fraudulent activities. Auditors are encouraged to be professionally skeptical and to adjust audit procedures based on the presence of these elements to identify and communicate potential fraud to management. The report references relevant auditing standards and provides context through sources like the Brumell Group and the Journal of Accountancy.

AUDITORS’
RESPONSIBILITY TO
DETECT FRAUD
THE FRAUD TRIANGLE

 Auditing may be considered to be
one of the most critical subjects of
business studies as the process of
auditing takes into consideration
lots of factors which are both
internal and external to the
business.
 Auditing may be defined to be the
process of attestation of assertions
made by the management.

 Preparation of books of accounts
and financial statements is the
primary responsibility of the
management.
 The auditor is responsible to check if
the said financial statements are
prepared in accordance with the
relevant rules and regulations along
with the standards applicable in
force for the given purpose (YAO,
2017).

 Since the auditors work on the
management’s assertions and
within a stipulated guideline, they
need to rely much on the internal
control and book-keeping system as
maintained at clients’ end.
 As a result, the evaluation of
internal control becomes mandatory
for the auditors to determine the
nature, extent and timing of audit
procedure.

 In other words, the auditors may
need to resort to sampling
procedure.
 Based on such, they opine on the
quality of the financial statement as
to whether the same depicts a true
and fair picture about the result of
the operations and also the financial
position of the business for a
specific period.

 As part of the auditing standards,
the auditors need to be a watchdog
and not a bloodhound.
 There should be a professional
scepticism with respect to any
observations and anomalies in
terms of deviation from the
benchmark standards.
 It is the duty of the auditors to
examine those audit matters with
great details as there may remain
the scope of fraud or

 However, as stated earlier, the
auditors should never be under
impression that the entire booms of
accounts are falsified and
misreported.
 The auditing standards have
specified few guidelines as to how
the auditors should work in case a
fraud is thought to be committed
ion the books.

 As per the given guidelines, there
should be some signalling about the
fraud being occurred.
 The relevant theoretical framework
is called the Fraud Triangle which is
shown in the next slide.

 As per the Fraud Triangle, there
should be clear evidence as to the
incentive to commit fraud.
 Such fraud may be committed by the
managers by way of inflating profits
to earn more profit based bonus; or
the fraud may be committed by the
employees by making the low-quality
product because of target imposed
by the management to enhance
divisional profit (YAO, 2017).

 Secondly, there should be the scope
of the opportunity to commit fraud.
 It may so happen that the incentive
exists but the fraudster does not get
enough scope to misappropriate the
assets.

 Lastly, the attitude and mindset are
equally important.
 Not all the employees or people
working with a business can commit
fraud. The fraudster will exhibit
specific behavioural characteristics
(Ramos, 2018).

 Being an auditor, it is the duty to
check these elements.
 If there is the slightest possibility of
existence of one of the elements
within the process of opinions and
internal control, the auditor should
take necessary steps.

 Such step will mean that auditor
should increase the nature, extent
and timing of audit procedure.
 Such activity should be undertaken
to identify the fraud and provide
probable resolution to the same to
the management through the formal
communication.

References:
 Group, B. (2018). The Fraud Triangle Theory.
Retrieved from
http://www.brumellgroup.com/news/the-fraud-tr
iangle-theory/
 Ramos, M. (2018). Auditors’ Responsibility for
Fraud Detection. Retrieved from
https://www.journalofaccountancy.com/issues/2
003/jan/auditorsresponsibilityforfrauddetection.
html
 YAO, J. (2017). Analysis of Management Fraud in
Listed Companies Based on Fraud Triangle
Theory. Destech Transactions On Social Science,
Education And Human Science, (aetms). doi:
10.12783/dtssehs/aetms2017/15857