Assume that you are an auditor and as part of your routine audit, you discover a fraud being committed by the accounts receivables manager. The fraud is large enough to have a material impact on the financial statements. How does this finding affect the rest of your audit?
The presence of fraud can affect the extent of testing and the audit procedures (acts performed by the auditor) to gather evidence; if fraud is suspected, the preliminary judgment of materiality selected will probably be lower than it would be otherwise. This affects the amount of testing: The lower the level of materiality is the higher is the amount of testing that must be performed. The suspicion of fraud also affects audit procedures selected: Tests that address fraud examination rather than compliance with accounting principles will be used.
An auditor who suspects that a misstatement (including an omission of information) could be the result of fraud is required to do the following:
Obtain additional evidence.
Consider any effects on other areas of the audit.
Discuss the auditor’s suspicion and her or his plan to obtain additional evidence with management who is at least one level above those suspected of perpetrating the fraud and with select persons including senior management and the audit committee if one exists.
Consider suggesting that the client seek the advice of legal counsel.