The international and the UK auditing standards recognise that auditors are responsible for obtaining reasonable assurance that financial statements should be free from material misstatements (MM). However, due to inherent limitations of an audit, some MM may not be detected (e.g. fraud).
There have been some big international fraud and audit failures. For example, the 2001 Enron scandal, eventually led to the liquidation of the Enron Corporation, an American energy company, and the de-facto dissolution of Arthur Andersen, which was one of the Big Five largest international audit and accountancy firms. Within the current UK context, it has been stated that: “Fraud is on the up and dominated by low-value cases, suggesting individuals are stealing less significant amounts of money in an attempt to avoid detection. The fact employee fraud has more than doubled in comparison to previous years is also concerning. It’s a stark warning that business leaders need to be observant when it comes to keeping an eye on potential fraudulent activity in their organisations and highlights the importance of implementing appropriate fraud prevention measures. Only by doing so will management teams be able to effectively mitigate risk and protect their business (S. Smith, Senior Manager, KPMG/UK, 2017).”
By referencing to auditing literature and professional standards, you are required to:
1) Briefly discuss the concept of financial statements fraud, and the auditors’ legal and professional responsibility;
2) Discuss how auditors can identify symptoms of fraud existence, what are the most appropriate detection techniques of their assessment process; and in which situations they may have difficulty in detecting existing fraud activities;
3) Evaluate the responsibility of, and actions by auditors when they detect fraud;
4) Critically evaluate the fraud impact on audited financial statements.