GAAP rules that will assist to determine the fraud in the key areas - Research Paper Example

? Research Paper Auditing of AUDITING Major scandals that have by the accounting profession in recent times have usually been a result of a fraud. Therefore in order to maintain confidence in the profession it is the major role of an auditor to prevent and detection of the fraud. New audit team has highlighted four key areas in which they suspect possible fraud. Auditor has highlighted these major problems. Leases on technology assets seem inflated Understated of e Commerce state tax payment Fictitious employees receiving post-employment benefits Hiding cash in order to help in future quarters where earning do not meet analyst’s expectations Concealing inventory shrinkage because it seems low for the industry GAAP RULES THAT WILL ASSIST TO DETERMINE THE FRAUD IN THESE KEY AREAS: There are many GAAP rules that assist to determine if the fraud is taking place all these areas. International GAAP, ISA 240 the Auditor Responsibilities Relating to Fraud in an Audit of Financial Statements recognizes that the misstatement in the financial statement can arise from the either fraud and error. The distinguishing factor is whether the underlying action that resulted in the misstatement was intentional or unintentional. The above all situations are supposed to be a fraud because the audit team found all these activities as a fraud. In relation with IAS 240, the fraud is a criminal activity. In addition, it is not a role of the auditor to determine whether the fraud is has actually occurred. That is the responsibility of a country’s legal system. Auditor must only be aware of the impact of fraud on the accuracy of financial statements. The GAPP rules state that the auditor is responsible for obtaining reasonable assurance that the financial statements, taken as a whole, are free from material misstatements, whether fraud and error. ISA 315 identifying and assessing the risk of material misstatements state assist to determine the determine fraud in the above mentioned situation. The GAAP rules that assist to determine the fraud in above situations are mentioned below separately. Leases on technology assets seem inflated: Technological assets are treated as the major asset of the company. Inflated leases amount can manipulate the figures of assets in statement of financial position of the company easily. In the light of IAS 240, the Auditor Responsibilities Relating to Fraud in an Audit of Financial Statements, Fraudulent financial reporting techniques are treated as Fraud. These are the techniques that can misstate the accounts to make the company look better/worse than it actually is. In this situation the GAAP assist to determine the fraudulent situation in this scenario because it is the possibility that the management of the company want to manipulate the figures of assets to make up the statement of financial position. Understatement of e-Commerce state tax payment: Misrepresentation of tax payments can show the better profitability figures in statement of comprehensive income. According to GAAP, Auditor has the responsibility to assure the financial statements are presenting true and fair view. That’s why the GAAP assist to determine the fraud in this case because if this activity is not treated as fraud, then the auditor will not be able to give the reasonable assurance on the truth and fairness of financial statements of the company. Fictitious employees receiving post-employment benefits: IAS 200 overall objective of the independent auditor state that the auditor is responsible for providing “an opinion in whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework”. The company accounts can be manipulated in material manner by the technique to giving post engagement benefits to fictitious employees. In this case, it is responsibility of the auditor to treat this activity as fraud to fulfill his primary aim of the audit. Hiding cash in order to help in future quarters where earning do not meet analyst’s expectations: GAAP state that the auditor must maintain an attitude of professional skepticism. In addition, the cash is one of the major assets of the organization. In this way the auditor should take an eagle eye on the cash movements to access the fraudulent activities with cash. Concealing inventory shrinkage because it seems low for the industry: The Company is trying to make up its position in the industry: As it is stated in ISA 240 that, fraudulent financial reporting technique to make the company look better/worse is treated as fraud and can impact on the auditor’s decision. In this way, the GAAP assist to determine the fraud in this activity because those have a direct impact on the auditor responsibility. IS THE RULES AND REGULATION ARE SUFFICIENT TO MINIMIZE THE RISK OF FRAUD: The rules and regulations are designed to minimize the risk of fraudulent activities in an organization. For example, ISA 240, the Auditor Responsibilities Relating to Fraud an error helps to recognize that the misstatement in the financial statements arises from either fraud or error. International accounting standard 12 and UK GAAP FRS19/FRS16 prohibit misstating the income tax figures of the entity. Generally accepted accounting principles also set the rules that how the organizations will work in efficient manner. According to point of view, these rules and regulation provide vital rules for entities in the direction of which they can carry out their function and can minimize the risk of fraud and errors in efficient manner. For example, the GAAP set the roles for the each person such as Auditors, director in an organization. According to GAAP rules, the directors have a primary responsibility for the prevention and detection of fraud. By implementing the system of internal control they should reduce the possibility of undetected fraud occurring to a minimum. Rules and regulations also support the function of internal auditing to minimize the risk of fraud and error in the organizations. Internal auditors can help to assess the like hood of fraud in organizations. They can also make recommendations for the prevention of fraud. In short, fraud is not an activity that can fully be banned in organizations due to its inherent nature but the rules and regulations can minimize the risk of fraud in efficient manner. CONSEQUENCE OF FRAUDULENT ACTIVITIES TO THE ORGANIZATIONS: Fraud is an intentional act by one or the more individuals among the management, those charged with governance, employees or third parties involving the use of deception to obtain an unjust or illegal advantage. Fraud may be perpetrated by an individual, or colluded in, with people internal or external to the business (ACCA, 2010). Fraudulent activities can cause many consequences to the organizations. Some of with proper examples are mentioned below Disqualification: If a director is involved in any of the fraudulent activity then he can be disqualified for 5 years by statue. In addition, there membership can be cancelled for the life time in serious cases. Reimbursement: If any fraud in the organization cause damages to a third party then it is the possibility that the responsible persons are forced by law to imbrues the innocent party for the losses that arise in respect of fraud. De-registration: In some fraud cases, the membership of company is cancelled and its name is removed from the companies register because of fraudulent activities. Imprisonment: In some extreme cases, responsible persons are imprisoned due to fraudulent activities. As in ENRON scandal, the persons those are involved in fraud had imprisoned and the audit company had been banned permanently by regulatory bodies. Penalties: If any organization is involved in any fraudulent activity then it may face heavy fines and penalties due to its fraudulent behavior. Sometimes heavy fines can create going concern problems for the entities. Reputation: The reputation of the company is damaged in material manner in the case of any fraudulent activity. Fraudulent activates directly create ta negative reputation of the company in the society. Company can lose its social vale and potential customers due to negative reputation. There are other many consequences that can arise in the case of any fraudulent activity to the organizations. In short, statue and regulatory bodies have set the strict rules to minimize the risk of fraud in an organization. HOW EACH READ FLAG CAN BE CORRECTED AND DESCRIBE WHO AND WHAT IS INVOLVED: Read Flag Recommendations Who and What is Involved Leases on technology assets seem inflated Record the correct amount of leases to eliminate the effects of fraud. A qualified professional who have the proper knowledge about all the methods and procedures about lease can be used for this purpose. Understated of e Commerce state tax payment Organization need to correct the amount of taxes in the accounts to assess the correct level of state taxes Company tax consultant or senior accountant should correct all the tax figures. Fictitious employees receiving post-employment benefits The company need to correct the employment record to correct eliminate the figures of Fictitious employees. An authorized individual should check the evidence about the existence of employees. Hiding cash in order to help in future quarters where earning do not meet analyst’s expectations The company needs to correct the cash account and make use proper cut off and occurrence procedures to assess the real amount of cash. Independent personnel of internal audit department should reconcile the electronic funds transfer and cash payments with related data properly and assess the correct level of cash. Concealing inventory shrinkage because it seems low for the industry The company should ensure that all inventory movements are authorized and recorded properly. An in depended team should count the inventory to assess the correct inventory level and valuation. INTERNAL CONTROLS TO PREVENT THESE RED FLAGS FROM REOCCURRING IN THE FUTURE: Leases on technology assets seem inflated Internal Controls Recommendations Who and What is Involved Checking the arithmetical accuracy of records There is need to check the arithmetical accuracy of the lease figures. In addition, the company should need to ensure that proper procedure is used to calculate the lease figures. A qualified professional who have the proper knowledge about all the methods and procedures about lease can be used for this purpose. Limiting the physical assess to records Only authorized person should have access to the records. This internal control minimizes the chance risk of manipulation in the lease records. A senior accountant or any other responsible person should allow changing the data and records. Approval and control of documents All the files about calculation of leases are approved an independent and trained person. In addition, the approval of the record are made an authorized individual. A qualified accountant of the company should calculate the leases figures. A Senior Accountant should check the accuracy and approve them to minimize the risk of any manipulation. Understated of e Commerce state tax payment Internal Controls Recommendations Who and What is Involved Control over computerized applications Organizations should take a reasonable care to control the accuracy of computer software. The main reason is that the computer software directly involves in e commerce sales. Manipulations can be made in the records if the software contains any error. A well trained computer specialist is use to ensure the accuracy of the system. In addition, antivirus can be used to protect the software form errors and bugs. Prevention or detection of un authorized changes to programs Organization should use the technique of segregation of duties to prevent any fraud in future. The entire computer Programs should be password protected and the programs should only assessable by the computer staff. The organization should also introduce strict control on the e commerce data. For this purpose, the company can give read only access to un-authorized person. A senior supervisor should delegate the separate duties to individuals. Computer passwords are accessible only by authorized computer operator. A trained computer professional should make changes in the software to limit the access level of e-commerce data. Control over inputs The ecommerce tax rates should properly include e in the computer system. This step can help to ensure the true level of tax payments on e-commerce sales. In addition, the organization needs to ensure the existence of all e-commerce tractions to judge the right figures of state taxes. Company’s tax consultant or senior accountant should review all the tax figures. Computer Assisted audit techniques such as software are used to check the completeness and accuracy of transactions. If E-commerce sales is made through telephone then the phone records can should be used to verify the transactions Fictitious employees receiving post-employment benefits Internal Controls Recommendations Who and What is Involved Checking the arithmetical accuracy of employees records The company should ensure that all the employees’ data have accurately recorded. An authorized individual should check the evidence about the existence of employees. Payment is made only to bona fide employees of the entity The management should introduce the function the segregate the duties between the HR and pay roll functions. Personnel files held for all employees. Management should introduce Authorization procedures fir hiring, terminating, time worked, wage rates, overtime, benefits etc. A separate individual should observe and evaluate the segregation of duties, review a sample of starters and leavers in the year to ensure correct documentation. Management of the company is involved to make a proper plan to tackle with employees data. Hiding cash in order to help in future quarters where earning do not meet analyst’s expectations Internal Controls Recommendations Who and What is Involved Occurrence: Only Valid cash payments are made The company should segregate the duties to verify the occurrence of the cash payments. Suppliers’ statements independently reviewed and reconciled to trade payables records. An authorized individual should observe, evaluate the proper segregations of duties, and review the supplier statements. All cash payments that occurred are properly recorded The company needs to review monthly bank reconciliation statements to check the completeness and accuracy of cash records. An authorized individual should review the accuracy and completes of the statements. A senior should review and inspect the flow of figures. Cut off The company needs to ensure that the cash payments are recorded in correct accounting period. Independent personnel should reconcile the electronic funds transfer and cash payments with related data properly. Concealing inventory shrinkage because it seems low for the industry Internal Controls Recommendations Who and What is Involved Occurrence and existence The company needs to ensure that all inventory movements are authorized and recorded. In addition, the management needs to ensure that the inventory included on the statement of financial position physically exists. An authorized individual should review the records. Rights and obligations The management needs to ensure that the inventory records include only those items that belong to the entity. The company should make procedures about the consignment inventory. Internal auditing department should insure about the proper existence of inventory to record the correct amount financial position. BIBLIOGRAPHY: Bpp Learning Media. (2009). Acca - F8 Audit and Assurance (Int): Study Text. Gardners Books. Bpp, L. M. (2009). Acca - p7 advanced audit and assurance: Passcards. S.l.: Bpp Learning Media. Weirich, T. R., Pearson, T. C., & Churyk, N. T. (2010). Accounting & auditing research: Tools and strategies. Hoboken, N.J: Wiley. Kaplan Publishing. (2007). ACCA: For exams 2007 and 2008. Wokingham: Kaplan Publishing. Fight, A. (2002). Measurement and internal audit. Oxford, England: Capstone Pub. Read More