THE ROLES OF INTERNAL AND EXTERNAL AUDITOR IN FRAUD DETECTION

             Current auditing standards: International Auditing and Assurance Standard Board (IAASB)

require that external auditors to provide reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud, in order to make an unqualified (clean) opinion standard on the financial statements.

               The level of the reasonable assurance is considered as a high level of assurance but not absolute assurance. However, in complying with their professional standards, independent auditors provide reasonable assurance that financial statements are free from material misstatements. 

               The central issue vital to the audit quality is the nature and extent of auditors’ responsibility to detect financial statement fraud. Nevertheless, there is a widening expectation gap between what auditors should be doing and what auditors are willing to accept and are capable of doing to discover fraud according to their standards of auditing and the fees collected for their services.

              However, the auditors are to focus on fraud in the financial statement. The external auditors had discovered fraud, fraudulent financial reporting in particular, as the main purpose of financial audit. In recent years, in the statement of auditing standards (SAS) no. 99 entitled consideration of fraud in a financial statement audit, it was directly referring to the professional role and profession of accounting estimates of the external auditors in detecting fraud in financial statements

            SAS no.99, request independent auditors to obtain information to determine the risk of financial statement fraud, risk assessment by participating in the program and control of the entity, and response with the evaluation result by changing the audit plans and programs. SAS no.99 also:

-          Increases emphasis on professional skepticism by requiring members of the audit team exchange ideas or brainstorm how fraud could occur

-          Requires discussions with management about their knowledge of fraud, suspicion of fraud, any awareness of allegations of fraudulent financial reporting, its understanding about the risks of fraud in the entity, and controls the programs. It has been established to mitigate specific fraud risks.

-          Request discussions with management about the nature and extent of monitoring of operating locations or business segments and whether and how it communicates with employees their views on business practices and ethical behavior requires auditors to make a point of taking to employees in and outside management in order to give employees and others the opportunity to blow the whistle

-          Requires auditors perform unpredictable audit test and respond to management override of controls.

On the other hand, in the corporate governance structure, the role of external auditors is to provide reasonable assurance related to the quality, integrity and reliability of the published, audited financial statements. Thus, the public expects auditors to detect financial statement fraud.