Page 78 - Internal Auditing Standards

Guide to Using International Standards on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts

Anti-fraud controls can be designed to address all five internal control components. However, in relation to

risks of material misstatement in the financial statements, special emphasis is placed on the tone set at the
top of the entity. This addresses the attitudes and actions of management toward control, and is part of the

control environment (see Volume 1, Chapter 5.3 above) which influences the control consciousness of all

personnel. A good “tone at the top” is considered by far the most effective anti-fraud control of all.
Two examples of anti-fraud controls applicable for smaller entities include:

• Journal entries
Non-routine journal entries have often been used by managers to commit fraud. A policy that non-

routine journal entries (over a specified amount) must be supported by an explanation and manager’s
signature (indicating approval) is a simple anti-fraud control that can be implemented in any size entity.
Such a policy empowers the entity’s accountant to always ask the manager (requesting an entry) for
an explanation and approval. This will not necessarily stop a senior manager from demanding an
inappropriate entry to be made, but the thought of having to physically document the approval and

provide an explanation may be enough to deter the request from ever being made in the first place. If
it does not deter the request, the auditor may notice that the entry was not approved and ask why. This
could then lead to further investigation.

• Segregation of duties
In smaller entities, the accountant or bookkeeper is often in a trusted position, with minimal supervision
and therefore ample opportunity to commit fraud. One possible (but somewhat costly) anti-fraud
control would be to hire a part-time bookkeeper to take over that person’s job for at least one or more
weeks per year, such as when the accountant is on holiday or performing other tasks. The policy of
employing a replacement could deter the bookkeeper from committing fraud at all, and if fraud is
already taking place, the replacement policy might provide an opportunity to detect it.

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