The role of Internal, External and Forensic Auditors - Essay Example

 The role of Internal, External and Forensic Auditors Introduction Fraud is a financial crime that arises when there is a premeditated misrepresentation that leads to the suffering of other people, mainly in monetary terms (Sawyer et al 2003 p 46). Fraud not only includes lying, but monetary losses must occur. This means that falsification of facts for the purpose of illegitimate monetary gains is different from distortion of information without causing monetary losses, which can not be termed as fraud. The practice is usually costly for people and organizations once it occurs. It is therefore important to ensure that all manner of fraud is prevented from occurring. Auditors play a significant role in the deterrence of fraud. They assist in risks detection and monitoring, control and regular testing of internal processes and suitable follow up for the purpose of dealing with weaknesses in the system. There are three types of audit; these include internal, external and forensic audit (Weightman 2008 p 38). This literature review presents a critical evaluation of the roles of the professionals involved in the three types of audit. Types of Auditors Internal Auditors An organization’s management decides the role of internal auditors whose objectives are usually different from those of external auditors who are chosen to give an independent report regarding the financial statements (Wholey et al 2004 p 66). They work towards satisfying the requirements of the management. Internal auditing is used by organizations as a strategy to assist the organization to accomplish its objectives. The internal auditors therefore are in charge of using the systematic methodology designed by the management to analyze the organizational processes, actions and events with the main goal of identifying organizational problems and suggesting possible solutions. External Auditors These are independent authorities that conduct regular checks on an organization’s records and books of accounts depending on the agreed procedures for external auditing. These auditors are usually concerned with attesting that there are no substantial misstatements in the books of accounts (Sawyer et al 2003 p 91). They provide essential information about the efficiency of the in-house controls in regard to financial reports, precision and punctuality in transaction recording, and the precision and wholeness of reports regarding monetary and regulatory issues. They also offer an independent and non-subjective opinion in regard to the activities of an organization, as well as vital information for the maintenance of its risk management processes (Weightman 2008 p 88). Forensic Auditors These are professionals who apply auditing expertise mainly in circumstances that have legal ramifications. Forensic auditors are mainly involved in investigating cases of fraud for the purpose of collecting facts to be used in court against the offender (Wholey et al 2004 p 76). Nevertheless, it is common in the contemporary workplace to avert fraud through identification and mending the gaps that could allow perpetrators of fraud a chance to commit the offence. This is a strategy for minimizing risks in the financial system. Kinds/ Types of Fraud Financial Statement Fraud The simultaneous occurrence of events in an organization may lead to fraud, especially when the organization’s core management is pressurized to indicate earnings. Falsifying financial statements is usually a common practice in such situations, which depends on the manner in which an organization keeps its records. It is commonly recognized that changing numbers is easy in the accounting records, which makes it easy for managers to carry out a financial statement fraud. For example as Bologna and Lindquist (2004 p 58) state, the management might misrepresent a liability as capital. Government Fraud This is fraud that leads to the deliberate loss of government funds through deceptive deals conducted on behalf of the government (Singleton et al 2006 p 93). It costs the tax payers huge sums of money in the economies where fraud is not controlled. It is considered to be amongst the most serious crimes in any economy. It is amongst the major drawbacks for economic development. Tax Fraud This is fraud that is committed when a person or group of people deliberately infringe the legal obligation to willingly pay tax that is supposed to be submitted to the government. Economies thrive through the funds collected from taxpayers. Tax fraud is considered to be a major offence since it affects the capability of the government to finance its activities (Sawyer et al 2003 p 112). Stock Fraud This kind of crime is also referred to as securities or investment fraud, whereby investors are deceived in to implementing procurement or sale decisions based on the wrong information, which usually leads to heavy losses. The stock market is mainly affected by this fraud (Singleton et al 2006 p 87). Health Care Fraud In this type of fraud, perpetrators usually place unnecessary claims regarding healthcare expenses. They usually claim to have incurred costs or request for subsidized healthcare drugs which they are not in need of. These are then sold at a cheaper cost to the needy people who have no access to the subsidized drugs. Health care professionals may also participate in this kind of fraud, whereby they claim payments for services that they have not offered (Wholey et al 2004 p 76). In all these forms of healthcare fraud, a person or a group of people incur losses. Tele Marketing Fraud In the contemporary marketplace, it is common for people to trade through telephone especially with the advancement in communication technology. There are many cases where traders and consumers have reported having lost a lot of money through telephone marketing (Aldhizer and Cashell 2009 p 24). They are deceived in to giving away cash, goods and services to untrustworthy individuals or groups whose intention is to rob their money. The continuous loss of money through fraud has had adverse impacts on organizations and individuals. Many less developed economies usually fail to advance due to government fraud. It is a practice that leads to the collapse of large institutions, organizations and bankruptcy amongst investors. It is therefore significant to conduct research in order to establish the roles of internal, external and forensic auditors in prevention of fraud. This can assist in safeguarding organizations from such financial crimes. Role of Auditors Internal Auditors Greenawalt (1994 p 4) observes that internal auditing is mainly used in organizations that have decentralized their operations. It is significant in controlling and offering a useful reaction on the business operations. Internal auditors usually follow certain standards that govern their work in order for them to assist the organization with their independent information. Of utmost importance is the detection of fraud. This may help the organization to avoid undesirable circumstances whereby it can lose money. Internal auditors also provide essential information regarding issues such as its level of compliance with the law, evaluation of financial reports to ascertain that they are reliable, establishing whether business operations are effective and useful, as well as linking with other external and forensic audit. Singleton et al (2006 p 97) observes that the organizations that use internal auditors are less likely to be affected by fraud than those which do not. Internal audit adds strength to the organization’s capability for risk management. Greenawalt (1994 p 4) notes that the span of internal auditing is not limited to financial purposes only. The auditors also participate in various fields that need auditing such as operational duties, as well as conformity with the government rules and regulations. Quality control is also an important function that is involved in the internal audit. This helps in ensuring that an organization complies with the standards that have been set, and that important activities such as awarding tenders and contracts are carried out within these standards. This is done through carrying out an audit of the organization’s financial information (Raaum and Morgan 2001 p 78). External Auditors Silverstone and Davia (2005 p 81) observe that an external auditor plays a significant role in determining and offering an independent and objective judgment regarding the effectiveness of the financial statements of an organization. He/she assists in the improvement of internal controls of an organization as well as its accounting systems through making the necessary recommendations after evaluating the books of accounts. According to Bologna and Lindquist (2004 p 113), the span of external auditing focuses beyond the organization’s conformity to government’s rules and regulations. External auditors ascertain whether the financial report is credible. This is made possible by the fact that they give an unbiased statement. They have a wider experience in regard to the various organizations in which they are involved in auditing, and therefore they are of paramount importance to the business through introducing this experience. Forensic Auditors Forensic auditors are important for organizations that are faced with the need for carrying out an investigation regarding a particular fraud in the system. They offer useful information regarding the manner in which a fraud was committed, and the circumstances that that led to the offence. This audit establishes the perpetrators of the crime, and the time that it was committed. It also helps in the quantification of the fraud for compensation purposes. The information obtained from a forensic audit is usually important evidence in the court of law if the organization or the offended party wishes to file a legal complaint against the perpetrators. There are situations whereby it helps the organization to detect an impending fraud. This is important in preventing organizations from incurring enormous losses (Singleton et al 2006 p 74). Methodology and Practices As Silverstone and Davia (2005 p 122) note, there is no standard methodology for conducting the audit. However, there are certain generally accepted principles that apply to the various types of audit. The tools and techniques applied are the ones that may vary. The basic principle to remember before embarking on any type of audit are; the type of audit to be performed, terms of reference as stated by the entity, the audit plan, the techniques to be used and the objectives of the audit. The objectives will determine the methodology of the audit. For example a risk assessment audit will have a different methodology from a certification oriented audit. The forensic audit will also adopt a different methodology depending on the objectives (Bologna and Lindquist 2004). Timings of Audit and Investigations Many organizations are known to conduct their audit at the end of a financial year. This timing applies mostly for the internal and external audit. However, the forensic audit is conducted mostly when need arises for evidence to be used in a court of law, or when there is suspected fraud in an organization (Greenawalt 1994 p 5). Comparison and Coordination of each three roles The three types of audit are significant in detection of fraud in the system. Internal auditors are mainly employees of the business, but they may also be outsourced. They are likely to be involved in constant audit in the organization. They usually work towards the accomplishment of the organization’s objectives in regard to the audit, and therefore the methodology and coordination is mainly the task of the management. External auditors are relatively more independent and may not be influenced by the entity where the audit is conducted. The auditors lay out their own procedures and methodology independently, which depends on the objectives of the audit. For the forensic audit, the information acquired is usually for use as evidence in the court of law, and other situations whereby evidence is needed regarding operations. It may also be driven by suspicion of fraud. The organization, just as in eternal audit does not have control over the process (Raaum and Morgan 2001 p 66). Comparison and Coordination There are internationally accepted standards of auditing that have been developed by the International Federation of Accountants. They highlight the responsibilities, planning for the audit, internal controls and audit evidence (Yan and Dunjia 1997 p 192). These should be observed in the auditing process. The three types of audit are different in the manner that they are conducted and the objectives of each of them. Greenawalt (1994 p 3) observes that the internal auditors have the role of ascertaining that the internal processes are effective and that the financial reports are credible. They are able to detect and prevent fraud. The external and forensic auditors can decide to use the report from internal auditors or carry out their own investigation of the financial statements (Sawyer et al 2003 p 43). The three types of audit are significant in detecting fraud. Limitation and Criticisms of each Function The three functions have various limitations that are unique to each. For example, the results of the internal audit are likely to be influenced by the management since this function is carried out to satisfy the management’s objectives (Aldhizer and Cashell 2009 26). On the other hand, internal audit may not be affordable to the small organizations, hence only the large organizations can use it. The organization depends on staff for the exercise, thereby encouraging fraud. When the staffs involved are not supported by the core management, it is likely for the process to fail. Raaum and Morgan (2001 p 56) observe that the report from the internal audit may also not present a true picture since they lack legal responsibility to the possessor of the financial statements. The forensic and the external audits may also not give the exact result since fraud may result from conspiracy between auditors and the staff (Aldhizer and Cashell 2009 p 31). This makes it necessary to have regulations to govern the practice. For example, SAS 99 lacks liability for the identification of fraud in corporate financial reports. It does not have clear guidelines regarding carrying out the audit or detection of fraud. Forensic audit also suffers the same limitations of not having clear guidelines to strengthen the practice. Opinions and Views According to Yan and Dunjia (1997 p 192), it is important to have clear and universal guidelines that should be followed by all professionals in auditing. These will facilitate their capacity to come up with consistent and credible reports. In regard to the problem of fraud that may arise from the conspiracy between staff members and the auditors, I am of the view that the auditing process should be open to the people who are concerned in order to prevent such situations. In general, auditing is a very important process in organizations, but there is still a gap that exists in their capacity to detect and prevent fraud. Further research is therefore important in order to establish ways of improving the ability of auditors to play their role effectively. References Aldhizer G. R. and Cashell J. D. (2009). Benefits and Problems Associated with Independent Auditors Taking on the Role of Internal Auditor. The CPA Journal, vol. 6(8) pp 23-35. Bologna G. J. and Lindquist R. J. (2004). Fraud Auditing and Forensic Accounting, Wiley. Greenawalt M. B. (1994). Student-written Case Studies: The Benefits to the Internal Audit Curriculum. Managerial Auditing Journal, vol. 9(2) pp 3-5. Raaum R. B. and Morgan S. L. (2001). Performance Auditing: A Measurement Approach, Inst of Internal Auditors. Sawyer L. B., Dittenhofer M. A. and Scheiner J. H. (2003). Sawyer's Internal Auditing: The Practice of Modern Internal Auditing, Institute of Internal Auditors, Inc. Silverstone H. and Davia H. R. (2005). Fraud 101: Techniques and Strategies for Detection, 2nd Edition, John Wiley & Sons Inc Singleton T. W., Bologna G. J., Lindquist R. J. and Singleton A. J. (2006). Fraud Auditing and Forensic Accounting, Wiley, John & Sons, Incorporated. Weightman J. (2008). The Employee Motivation Audit, Cambridge Strategy Publications. Wholey J. S., Hatry H. P. and Kathryn E. (2004). Handbook of Practical Program Evaluation, Jossey Bass Nonprofit & Public Management Series. Yan J. and Dunjia L. (1997). Performance Audit in the Service of Internal Audit. Managerial Auditing Journal, vol. 12(5) pp 192-195. Read More