Project Paper
In general, an audit entails evaluating a subject matter to express an assessment on whether it is portrayed honestly. Numerous kinds of audits can be done, for instance, financial statement auditing, internal control over accounting information auditing, and compliance auditing. The requirement that an auditor audit corporations’ financial statements has long been a foundation of global financial system credibility. An audit’s value is that it ensures management has given a fair and honest picture of the financial performance of a business and situation (Rimmel, 2020). In simple terms, it gives an assurance of what the management has presented. The cooperation and accountability between people who run an organization and the owners need a fair and honest perspective. The purpose of this research paper is to provide an understanding of financial statement audits and fraud risk management.
Organizations develop financial reports in compliance with a set of generally established accounting practices that apply to their jurisdiction, often known as accounting principles or financial reporting requirements (Robinson, 2020). Auditors assess the true and fair view of those financial statements using a framework of widely accepted auditing principles, which define the criteria and recommendations for conducting an audit.
There are several fundamental aspects of audit and they include the following. Examination of all systems; the assessment of all systems and practices related to accounting and financial operations is the primary goal of any audit. Before beginning the examination of the final reports of accounts, the auditor should first comprehend the system and its operation. This serves as the foundation for the whole auditing process. Organizational controls evaluation shows the extent of the audit will be determined by the efficacy of the institution’s internal control system. The auditor can depend on the system if the organization’s internal controls are implemented and extremely effective. Precision in arithmetic; the auditor must also examine the correctness of the account books regularly. This involves double-checking the books’ arithmetical correctness and verifying that the entries are properly posted. Fundamentals of accounting; the auditor must check that the capital and income transactions are properly distinguished. All business statements must fall into one of two categories: income or capital. The auditor must also verify the correctness of both revenue and spending items.
Other aspects of an audit include assets and liabilities verification; all of the organization’s assets must be physically verified. As a result, the auditor must examine all legal papers, certifications, official reports, and other documents to determine the possession of all assets. All of the company’s liabilities must also be verified. They can also seek verification from outside parties if required. Finally, there is vouching and legal compliance. Every financial transaction results in a trail of evidence. The auditor must evaluate these supporting papers to ensure that these transactions occurred and are accurate. This is referred to as vouching. It is also the auditor’s responsibility to ensure that the organization’s financial statements are in accordance with all applicable laws, guidelines, and requirements at all times.
Assurance is typically followed by an audit. The primary goal of assurance is to ensure that financial statements are accurate. It also ensures all stakeholders that there has been no falsification of accounting transactions, no misappropriation of funds, no misconduct, and no fraudulent acts in or by the organization. Financial statements are checked for compliance with accounting standards and principles. Assurance is used to evaluate a process, method, or operation, and these methods and processes are continuously monitored to ensure that the process is correct and produces the best outcomes possible (Savčuk, 2007). Assurance is concerned with evaluating and enhancing an organization’s information quality. It also aids in organizational decision-making by focusing on consumer feedback, financial data, employee input, and other sectors where data is critical in making decisions. Aspects of assurance engagement include a three-party collaboration, relevant subject matter, proper criteria, enough, relevant proof to substantiate the conclusion, and a conclusion included in a formal report.
Auditing is very important because a thorough audit will reveal insights into areas where management may strengthen their controls or procedures (Rezaee, 2005). In some cases, the auditor may be compelled to inform management and others in charge of governance about control problems. These discussions provide value to the business and contribute to the improvement of overall operations.
When it comes to fraud, it erodes the confidence that is required for organizations to do business. Management is in charge of operating the business as well as avoiding and identifying fraud (Fogarty, et al., 2007). Since fraud is purposefully concealed and may entail coordination by numerous individuals, preventing and discovering it is challenging. Even if audits are conducted in conformity with applicable auditing standards, they may fail to discover substantial fraud. Auditors, on the other hand, are in charge of getting reasonable assurance that the accounting information is not significantly misrepresented due to fraud. Based on my interaction with professionals, fraud is a threat to all companies. Large-scale frauds have resulted in the demise of whole companies, huge investment losses, significant litigation expenditures, the incarceration of important persons, and a loss of trust in financial markets. Top leaders’ exposed deception has harmed their personalities, brands, and businesses across the world.
Irrespective of an organization’s position as governmental, private entity, public, or non-profit, its size, or its sector, good corporate governance principles dictate that its executive board, or monitoring committee, maintain generally high ethical conduct which is honesty and integrity throughout the organization. Since top management in cooperation with other personnel usually conducts most significant frauds, the board’s participation is essential. The boards and top management’s attitude toward accounting irregularities, as well as the company’s fraud risk tolerance, are communicated to the public, partners, and authorities through diligent management of fraud instances inside the company.
Fraud risk is supposed to be managed by individuals at all levels of the company, including every rank of leadership, employees, audit committees, and the business’s external auditors. They must clarify how the company is reacting to increased regulatory requirements, and also governmental and stakeholder oversight, what type of fraud risk management program the company has, how it recognizes fraud risks, things done to prevent risks, or at least identify fraud, and what methodology is in place to start investigating fraud and take immediate measures.
My proposed recommendation and solution about this topic is that financial statement auditing should always be a priority for businesses. An audit is crucial because it offers a set of accounting statements legitimacy and offers shareholders trust that the accounts are honest and fair. It also aids in the improvement of an organization’s internal controls and procedures. A risk monitoring program should be in place as a component of an organization’s governance framework, with a documented policy to communicate the executive boards as well as top management’s responsibilities for managing fraud risk in the organization. A company’s fraud potential risk must be analyzed regularly to identify particular possible methods and occurrences that need to be avoided. Wherever practical, prevention methods to eliminate probable critical fraud potential risks must be devised to limit the organization’s potential damage. When fraud is being prevented, detection procedures must be applied. To guarantee that possible fraud is dealt with effectively and immediately, a reporting procedure must be in place to obtain information on suspected fraud, and a unified strategy to inquiry and remedial action should be implemented.
This particular topic is of interest to me because it helps me understand financial statement auditing, the need to audit as well as its importance. It also helps me to understand the need for ethical organizational behavior, the importance of honesty and integrity when it comes to handling accounting transactions. This topic has also made me realize that the cornerstone of fraud risk management is strong governance mechanisms. Any fraud risk management strategy is severely impacted by a lack of adequate organizational governance. The attitude of the organization’s leadership sets the standard for its acceptance of deception.
This topic helps in understanding fraud risk management and assessment. To successfully and efficiently defend itself and its shareholders against fraud, an organization must first identify fraud, misconduct, and the unique threats that relate to it directly or indirectly. A systematic fraud risk analysis, suited to the size, complexities, sector, and objectives of the company, should be undertaken and reviewed regularly. Risk analysis, risk probability, and significant evaluation, and risk monitoring should all be included in the assessment, whether it is part of a larger corporate risk assessment or done separately.
Other individuals should also share the same concern of ethical organizational behavior. Ethical company practices can aid in the development of a positive reputation. A company’s image for ethical conduct may help it build a good public image in the industry, which can lead to new client recommendations. In this era of social networking, when unsatisfied individuals may immediately circulate information about their horrible encounter, a reputation for unethical practices damages the organization’s prospects of gaining new clients.
References
Fogarty, J. A., Graham, L., & Schubert, D. R. (2007). Assessing and responding to risks in a financial statement audit: Part II. Journal of Accountancy, 203(1), 59. https://search.proquest.com/openview/cebccf402f03c56d093becd646d187ab/1.pdf?pq-origsite=gscholar&cbl=41065
Rezaee, Z. (2005). Causes, consequences, and deterrence of financial statement fraud. Critical perspectives on Accounting, 16(3), 277-298. https://www.sciencedirect.com/science/article/pii/S1045235403000728
Rimmel, G. (2020). Sustainability audit and assurance. In Accounting for Sustainability (pp. 180-192). Routledge. https://www.taylorfrancis.com/chapters/edit/10.4324/9781003037200-17/sustainability-audit-assurance-gunnar-rimmel
Robinson, T. R. (2020). International financial statement analysis. John Wiley & Sons. https://books.google.com/books?hl=en&lr=&id=Q7nEDwAAQBAJ&oi=fnd&pg=PR15&dq=Understanding+a+financial+statement+audit&ots=iEEY1HjL2i&sig=hOb4OMaR_W8DOOwKBJ710Q1ITKU
Savčuk, O. (2007). Internal audit efficiency evaluation principles. Journal of Business Economics and Management, (4), 275-284. https://www.ceeol.com/search/article-detail?id=141155
