Are Audits just to uncover fraud?

Date: 12 July 2012

Many people think that the purpose of an audit is to hunt out fraud and find those who are stealing from an organisation.  With many of the court cases that come to light as a result of an audit, this is a reasonable assumption.

In the current economic environment there may be greater potential for members of an organisation to commit fraud by misappropriating cash or other assets of their organisation.  Generally, for this to occur there must be three factors present for an ordinary person to commit fraud:

Opportunity  - cost cutting/staff reductions may weaken internal controls

Rationalisation - concern about job security

Pressure/Incentive - people under personal financial pressure

Auditors are naturally skeptical, but there are also factors built into an audit program that are designed to help minimize the opportunity for people to commit fraud:

  • Visit business premises and observe
  • Discussion with owners/management and key personnel
  • Independent review of internal systems and controls
  • Evaluation of the performance of the accounting system 

Comments and recommendation for improvement are often included in a reporting letter to management once the audit is complete.

An audit will not find all instances of fraud, particularly when an individual is determined to "rip the system off" or there is some collusion with outside parties.

What an audit will do is ensure that there are robust systems in place to minimize the risk of fraud occurring.  Once these, and recommendations on improving financial reporting are implemented, management will have the tools in place to operate a successful business. 

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