Many of the times, external auditors are unable to detect corporate fraud as they are more focus towards financial audit. It has nothing to do with the competency level.

Forensic accounting work entails a different set of skills and experience besides the usual accounting skill whereas the financial audit is more to express an opinion on whether there are any major misstatements of company accounts based on generally accepted accounting principles and auditing standards. For obvious reason,corporate fraud is always a deliberate ploy or action by an individual and/or group to deceive an organisation for personal or collective gains. 

In Forensic/Fraud Audit, the forensic accountants specifically look for evidence of fraud and the process and procedures are different compared with financial audit. It entailed many aspects and the work scope was beyond what auditors have to doFor example, the forensic accountant would run a battery of tests on the company’s accounts including:

• physical examination and investigation of its operations such as debtors and stock levels,
•  investigate in detail from accounting irregularities,
• tests on system applications,
• variances in debtors and stock levels,
• invoices and even visit customers and suppliers if necessary. 
• Other intangibles like body language were also things that need to be observed and assessed.

In fact there are no quick and fast rules to fraud detection. The forensic accountant will do whatever is necessary to detect fraud, be it through investigations of systems, billings, stock and people working for the company. It is very much like a private detective Hence, normally the detection of fraud in any organisation or company is left to the experts as investigation goes beyond normal professional accounting work scope which are external parties who specialize in fraud detection/forensic audits.  To those forensic accountants, some of the indicators of fraud or common red flags includes the following:

·         rapid growth of the company versus industry growth,

·         abnormal profits in contrast with general economic performance,

·         unusual variances in stock and debt levels,

·         financial ratios, and

·         movement of funds. 

In the event that an auditor has to review and diagnose the going concern difficulties of his/her clients, he/she should at the very least:

• compare the client’s cash flow forecasts with the overdraft or other loan facilities available for up to twelve months from the accounting date
• obtain written confirmation from the board of the holding company (if any) that it intends its subsidiary to continue in business and will not withdraw existing financial supports
• enquire into and obtain written evidence of the steps(if any) the client is taking in order to correct its decline in fortunes.

If the auditor cannot satisfy himself that the client will remain in business in the foreseeable future, then he must consider the validity of the going concern basis and the need to qualify his audit report in appropriate terms

1. to confirm and ensure the independence and objectivity of external auditors and review with management any areas of disagreement between management and the external auditors;
2. to review and recommend approval of or otherwise the company’s major accounting policies, principles and practices;
3. to review with the external auditors the interim and final results of the company;
4. to discuss with the external auditors the scope of the external audit, the extent of their reliance on internal audit, and any matters arising from the external audit;
5. review with the Chairman and Chief Executive the adequacy of internal control systems including the internal audit function; its professional standards; scope; resourcing; reporting arrangement; work plan and interface with the external auditors. The Chief Internal Auditor or Head of Internal Audit must have direct access to the Audit Committee;
6. to approve the external audit fee and review any non-recurring, non-audit services to be performed by the external auditors and to appraise and report on any possible conflicts of interest;
7. to review the responses of management to major recommendations made by external or Internal Audit;
8. review policies and practices involving legal compliance, ethics and other such matters and ensure that these are adequate;
9. to meet with the external auditors at their request at any time they deem necessary.

Some of the pertinent points we need to understand about audit planning are:

(a)    Understand  the need to do Audit planning:

This is basically to ensure that:

·     The audit is carried out in an effective, efficient and timely manner;

·     appropriate attention is devoted to the different areas of the audit;

·     potential problems are identified;

·     audit review is facilitated;

·     audit resources will be used more efficiently in planned key focused areas;

·     assignment of work to the members of the audit team based on their varying degrees of skill and experience so that they are not required to carry out audit task which are beyond their level of competency;

·    at the planning stage, due consideration should be given to the co-ordination of work to be carried out by experts or other auditors if appropriate;

·    the fact that the audit assignment is the commercial activity of the audit firm should be recognised, and if the costs of carrying out the planned procedures are likely to exceed the client entity’s budgeted fee then this imbalance should be addressed at the planning stage by consultation with the management of the entity.

(b)   Formulation of A Documented Audit Plan

     We need to be aware that an audit plan is a structured plan of action mapping out the audit procedures to be carried out with the aim of reporting on whether a specified set of accounts show a true and fair view. It’s therefore is integrated with the normal standard documentation and check lists to ensure a comprehensive audit plan.

In formulating a documented plan the following matters need to be considered:

• Knowledge of the entity’s business;
• Risk and materiality;
• Nature, timing and extent of audit procedures;
• Co-ordination, direction, supervision and review of the audit.

( c ) An Audit Plan Is Not A Fixed Plan

We need to understand that the nature of an audit plan needs to be flexible and subject to change, dependent on the findings and events occurring during the audit process.

Examples of findings or events which might lead to a revision to an audit plan include:

• Significant errors found in the processing of invoices through a sales accounting system. This could lead to a revision of the extent of testing and audit resources to be applied to the sales area of the accounts.
• Notification from the management of an entity that audited accounts are required at a date earlier than previously notified. This could lead to revision of the timing of audit procedures with a consequent increase in audit resources being allocated to the assignment.
• The revelation during the audit of the bank and cash area, of the existence of an additional bank account held by the entity but not previously notified to the auditor. This would lead to additional audit procedures being carried out in this area.

In summary, planning is an integral part of the audit process. Whilst the audit procedures carried out on specified audits will vary depending on the nature, size and complexity of an entity’s operations, good audit planning is crucial if an auditor wishes to ensure that an audit is carried out in an effective, efficient and timely manner.

• To express an opinion whether the financial statements give a true and fair view of the state of the company’s affairs and of the profit or loss for the year and whether they comply with the Companies Act and International Statements of Accounting Standard;
• In order that the external auditor can express the aforesaid opinion on the true and fair view , he or she needs to perform the following audit works:

• Perform sufficient tests to obtain reasonable assurance as to whether the information contained as underlying accounting records and other source data is reliable and sufficient as the basis for the preparation of the financial statements.

• However, the information used by the directors in preparing the financial statements will invariably include facts or judgements which are not themselves recorded in the accounting records.

• As part of the audit process, the external auditors shall request appropriate directors to sign a formal letter to us to confirm such facts in judgements and to help ensure that no information has been omitted or inadvertently withheld from the auditors. Such formal letter is known as Letter Of Representation.

Append below is a Sample of CLIENT REPRESENTATION LETTER

Client’s Letterhead

(Date – date of

auditor’s report)

Auditor Name

Chartered Accountants

(Address)

Dear Sirs,

We confirm, to the best of our knowledge and belief, and having made appropriate enquires of other directors and officials of the Company, the following representations made to you during your audit of the financial statements of Company:XXX. for the financial year ended 31 December 2005 for the purpose of reporting to the members of the Company in accordance with the provisions of Section XX of the Companies Act, XXXX.

1. We acknowledge as directors that our primary responsibility is to ensure that the financial statements of the Company comply with the provisions of the Companies Act, XXXX and applicable approved accounting standards in XX; and that they give a true and fair view of the state of affairs of the Company as at 31 December 2005 and of the results and cash flows of the Company for the financial year ended on that date.

2.There have been no irregularities involving management or employees who have a significant role in the system of internal control, or other employees that could have a material effect on the financial statements of the Company.

3. We have made available to you all books of accounts and supporting documentation and all minutes of meetings (including circular resolutions) of shareholders and board of directors, executive committee of the board of directors. They are complete and authentic records of all meetings (including circular resolutions) held during the financial year and up to the date of this letter and we have disclosed them to you in writing.

4. The financial statements of the Company are free of material errors and omissions.

5. We have made available to you all significant contracts. The Company has complied with all aspects of contractual agreements that could have a material effect on the financial statements of the Company in the event of non-compliance. There have been no communication concerning non-compliance with requirements of regulatory authorities with respect to financial matters.

6. Balances and transaction with related parties have been properly recorded and when appropriate, adequately disclosed in the financial statements of the Company.

7. We have reviewed the carrying amounts of the assets, other than financial assets of the Company as at 31 December 2005. There is no indication of impairment in value of any assets as at the balance sheet date.

8. We are of the opinion that the fair values of financial instruments, where applicable, of the Company disclosed in Note 17 have been arrived at based on factual estimates.

9. We have no plans or intentions that may materially affect the carrying value or classification of assets and liabilities reflected in the financial statements of the Company.

10. We have identified all doubtful receivables. No allowance for doubtful debts is necessary to be made as we are of the opinion that all debts are fully collectible.

11. Inventories are stated at lower of cost and net realizable value. No inventories are stated at an amount in excess of net realizable value. Items to which the Company has no title and items sold by the Company up to and including the balance sheet date have been excluded from inventories. Goods held by third parties and other items to which our Company has title have been included.

12. The Company had satisfactory title to all assets and there are no liens, or encumbrances on the Company’s assets.

13. We have recorded or disclosed all liabilities, both actual and contingent.

14. There have been no events subsequent to the balance sheet date which require adjustment of or disclosure in the financial statements of the Company and notes thereto.

15. No claims in connection with litigation have been or are expected to be received.

16. There are no formal or informal compensation balance arrangements with any of our cash accounts.

17. We have taken precautionary measures to ensure strict adherence to relevant laws, including the Companies Act, XXXX and other rules and laws applicable to the Company. We confirm as at the date of this letter, that there is no incidence of breach or non-performance of any requirements or provisions of the aforementioned rules and laws or any matter which may adversely affect to a material extent the financial position of the Company.

18. We acknowledge our responsibility for the implementation and operations of accounting and internal control systems that are designed to prevent and detect fraud and error.

We have assessed the risk that the financial statements may be materially misstated as a result of fraud and we confirm to you that such risk has been adequately dealt with to enable the preparation of the financial statements on a true and fair basis.

We are not aware of any fraud or suspected fraud that may have affected the entity.

Yours faithfully,

Signature ………………………………………..

Name :

(Managing Director or Executive Director)

Signature ………………………………………..

Name :

(Director or officer responsible for the financial management of the Company)

One tool used by the external auditor is to obtain confirmation from its financiers like its holding company or its sister subsidiaries whether they would be “ pulling the plug” by asking the audited companies to pay up its debts owing to them.

Append below is such a Sample of Letter Of Financial Support

Date: XX/XX/XXXX

Name Of Auditor

Address

Dear Sirs

FINANCIAL SUPPORT FOR COMPANY ABC

We confirm that we will continue to support Company ABC. by providing adequate financial assistance to enable the Company to continue its business operations as a going concern for the foreseeable future.

We would also confirm that we will not recall or demand any repayment of the advances made to Company ABC. (“the Company”) as at 31 December 2005, except that insofar as the funds of the Company permits repayment and that such repayment will not adversely affect the ability of the Company to carry on their business operations as a going concern.

Thank you.

——————–

Name: Mr XYZ

Designation: Director

(on behalf of ABC Group of Companies.)