Sunday, May 31, 2009

Understand the role of the external auditor

The role of the external auditor has often been misunderstood. This “expectation gap” has long been explained as being the gap between what the actual requirements and standards required of the auditor and audit process as compared to the expectations of the public as to what an auditor does in the audit process.

It has often been thought that the audit provides certainty as to the accuracy of the financial statements by the auditor undertaking a 100% check of the organisation’s accounts. It has also been thought that auditors should be able to provide early warning if there are solvency problems with the organisation and lastly, it is thought that a primary role of the auditor is to detect fraud.

An example of this can be seen in the BDO Not-for-Profit Fraud Survey 2008. 61% of respondents to the survey gave a reason they did not perceive fraud to be a problem for their organisation was that fraud had not been discovered by the external audit process.

It is important that not-for-profit organisations understand the role of the audit and not to relying solely on the external audit process as a way of detecting fraud. It is also important to consider that auditors, while conducing an audit as per the auditing standards, they are also conducting the audit on a fee paying basis. To undertake an appropriate audit, an appropriate fee is required to be paid.

Auditing standards provide us with guidance as to the auditors’ responsibilities regarding fraud. For example:
  • “The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. It is important that management, with the oversight of those charged with governance, place a strong emphasis on fraud prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment. This involves a commitment to creating a culture of honesty and ethical behaviour which can be reinforced by an active oversight by those charged with governance.” Paragraph 4 of ASA240 (Australian Auditing Standard – The Auditor’s Responsibilities Relating to Fraud in an Audit of a Financial Report)
  • “The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not material to the financial statements are detected.“ – SAS99 (US Auditing Standard – Consideration of Fraud in a Financial Statement Audit).

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