Page 332 - JoFA_2022

FRAUD
Fraud is suspected:

Now what?

Follow these do’s and don’ts for auditors when potential

wrongdoing surfaces.

By Nathan D. Salsbery, CPA, CGMA

F identify the occurrence of fraud, the auditor does About the
raud can occur within any organization
regardless of size or sophistication, even when
not make legal determinations of whether fraud has
internal controls seem effective. Despite this
harsh reality, many audit clients and auditors are actually occurred” (¶ .3). author
The legal determination of whether fraud has
Nathan D. Salsbery,
caught off guard when they become aware of occurred is made by a judge or jury, not by manage-
CPA, CGMA, CFE,
alleged fraud. This article addresses how auditors ment and not by the auditor. So, when suspicions or
is a partner in the
should respond if suspicions or allegations of fraud allegations surface during an audit, it is important
Colorado Springs
surface during a financial statement audit. not to make conclusive statements of guilt or
and Denver offices
To begin with, it is important for an auditor to innocence either orally or in writing.
of CapinCrouse
remember the definition of fraud in the context Instead, advise your audit client to seek legal
LLP and serves as
of an audit. AU-C Section 240, Consideration of counsel regarding what steps to take in response to
the firm’s executive
Fraud in a Financial Statement Audit, defines fraud the allegations. Even though the client’s action or
vice president for
as “An intentional act by one or more individuals … inaction in addressing suspected fraud may affect
the West region.
involving the use of deception that results in a mis- the trajectory of the audit engagement and raise
statement in financial statements that are the sub- issues such as whether an audit firm can issue an
ject of an audit” (¶ .11). With allegations of fraud, opinion or should withdraw from the engagement,
the key consideration for an auditor is whether the it is not the auditor’s role to be legal adviser to the
fraud might result in material misstatement of the audit client. The auditor instead needs to focus
financial statements. While allegations of fraud on an appropriate audit response to the situation
should always be appropriately considered by the within the context of generally accepted audit-
auditor, not all fraudulent acts will necessarily have ing standards.
a material impact on the financial statements. Audi-
tors are mainly concerned with misstatements that WHAT TO DO IF THERE IS SUSPECTED FRAUD
IMAGE BY MIRAGEC/GETTY IMAGES misappropriation of assets. on what not to do, so what should you do if you
Our discussion to this point has focused mainly
result from either fraudulent financial reporting or
Before discussing what to do as an auditor if you
become aware of suspicions or allegations of
become aware of potential fraud, let’s highlight first
fraud during an audit? First, be familiar with
what you should not do: Never draw conclusions
the requirements of AU-C Section 240. This is
of guilt or innocence. As AU-C Section 240 states:
essential and informs the practical steps listed
“Although the auditor may suspect or, in rare cases,
journalofaccountancy.com below. Be especially aware of Paragraphs .35, August 2022 | 15