Audit Procedures That Helps in Detecting Fraud
Having audits does not mean that the company can find out every fraud that occurs in its financial statements. However, auditors from audit firms Johor Bahru are responsible for detecting material misstatements which happen due to error or fraud in those statements. Accordingly, the Malaysian Approved Standards on Auditing (MASA) states that the auditors should prescribe certain audit procedures for the detection of fraud. If you know some of those procedures, you will be able to align the resources for the audits of your company better.
Having Fraud Brainstorming Session
According to the MASA, the audit engagement team must have a fraud brainstorming session before they start performing the audit. The audit partner will lead this session, and this process enables them to think about possible ways for the company to commit fraud. Besides, this brainstorming session helps the auditors in setting a tone of professional scepticism for that audit. Usually, the auditors will need a fraud specialist to join this session to obtain some insights about the frauds that similar industries or companies have committed. Doing so helps them to determine the risk factors of their client, sometimes by doing audit sampling.
Performing Journal Entry Testing
If the company intends to commit material financial statement frauds, it will have to adjust its financial records. For this reason, the auditors will test the journal entries of the company and see if any signs of manipulation exist. Before performing the journal entry testing, the auditors need to understand the procedures and controls of the company (Also see What is a Test of Control?) and select some samples from its journal entries. Usually, they will select entries that the upper management has made, or those that the staff has posted late in that particular accounting period, or those that carry large values. As soon as the auditors have selected the samples, they will request for supporting documents which validate the double entries posting.
Inspecting Accounting Estimates
There is a higher probability for frauds to happen in accounting estimates. As the estimates are subjective, it is easier for the management to influence them to manipulate the company’s financial statements. The auditors may use two methods to determine whether any fraud has occurred in the accounting estimates. Firstly, they can perform a pattern analysis procedure and identify whether the company has implemented a different method to complete the accounting estimates. This is because the alterations in the methods used may indicate that there is manipulation. Secondly, the auditors may assess the fluctuation of the accounting estimates. As an instance, if almost all the estimates in the previous year show a decrease in the company’s revenue, while most of the estimates of the current year show the opposite, the auditors may consider the possibility where the company has transferred its revenue from a period to another.
Checking for Significant Unusual Transaction
According to recent revisions in the MASA principles, the auditors need to complete certain audit procedures to assess significant unusual transactions which are irrelevant to the normal operation of the business. In this process, the company needs to explain to the auditors about the business rationales and the purposes of the transaction. As soon as the auditors get the explanation from the management of the company, they need to corroborate the response of the management with the information they have received when they perform the audit.