Fraud and error present risks to an entity. Both internal and external audito...
Fraud and error present risks to an entity. Both internal and external auditors are required to deal with risks to the entity. However, the responsibilities of internal and external auditors in relation to the risk of fraud and error differ. Required: (a) Explain the responsibilities of the Internal Audit function in respect of the risk of fraud and error. (2 marks) (b) Explain the responsibilities of External Auditors in respect of the risk of fraud and error in an audit of financial statements. (2 marks) RAMALS Travel is an independent travel agency. It does not operate holidays itself. It takes commission on holidays sold to customers through its chain of high street shops. Staff are partly paid on a commission basis. Well-established tour operators run the holidays that RAMALS Travel sells. The networked reservations system through which holidays are booked and the computerised accounting system are both well-established systems used by many independent travel agencies. Payments by customers, including deposits, are accepted in cash and by debit and credit card. RAMALS Travel is legally required to pay an amount of money (based on its total sales for the year) into a central fund maintained to compensate customers if the agency should cease operations. (c) Describe the nature of the risks arising from fraud and error to which RAMALS Travel is subject.static/image/hrline/5.gif
sol :integrity.They assist management with the evaluation of internal controls used to detect or mitigate fraud, evaluate the organization's assessment of fraud risk, and are involved in any fraud investigations.Although it is management's responsibility to design internal controls to prevent, detect, and mitigate fraud, the internal auditors are the appropriate resource for assessing the effectiveness of what management has implemented.prevention : As a part of their assurance activities, internal auditors watch for potential fraud risks, assess the adequacy of related controls, and make recommendations for improvement.detection : Because the internal auditors are exposes to key processes throughout the organization and have open lines of communication with the executive board and staff, they are able to play an important role in fraud detection. In many organizations, the chief audit executive (CAE) is responsible for responding to issues raised on the ethics hotline or through another process that may lead to detection of fraud.investigation : Internal auditors may either have a direct role in investigating fraud incidents, or act as a resource to those responsible, they generally are not expected to have the expertise of those whose primary responsibility is detecting and investigating fraud.Conclusion:Internal auditors can identify where fraud risk exists and make recommendations to adequately mitigate such risks. Senior management often focuses on running the company and may not place enough emphasis on monitoring key processes or controls. An internal audit can help monitor and reduce errors and fraud.Responsibility of External Auditors in relation to fraud and error: External Auditor is responsible for review the financial statements of the company.Auditor are responsible to comment on the financial statements of the company.Risk inherent with the financial statements is the primary responsibility of the external auditor to addresses such risk.External auditor's Responsibility for Detecting and Reporting FraudUnder the Sarbanes-Oxley Act each public company should have an audit committee that oversees and governs the integrity of financial reporting within the company. This committee also oversees the auditors, both internal and external. Upon finding evidence of fraudulent accounting, the external auditor must communicate her findings to the committee or other governing body within the organization. The external auditor also reports findings of procedures that could possibly put the company at risk of possible fraud. Under the act, the auditor cannot assist in creating new procedures or guidelines for the company. They must maintain a professional distance and can only offer opinions and assessments of current systems.Types of Accounting FraudThe most common type of fraud auditors uncover is revenue recognition errors. Revenue recognition is reporting revenue that the company earns. Some companies may mistakenly report revenue that is not completely earned, which happens in cases where payment is for an annual period and the company reports all the revenue upfront. The correct reporting would recognize or report the revenue over a year. Auditors also find evidence of fraud in estimates of accounts payable and other accounting estimates. Some findings are not fraudulent but may lead to accounting errors or put the company at risk such as overlapping accounting duties. For example, the person who makes the bank deposit should not balance the bank statement.Ways to Detect FraudExternal auditors review journal entries and interview the company's accountants on procedures to uncover potential risks. They will meet with management to gain an understanding of procedures and then test those procedures for SOX compliance. They also review any large or unusual transactions or journal entries that occur outside the normal scope of business. Auditors also ensure that there are proper controls in place to deter any possibilities of fraud.
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