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Session 2

Attributes, Standard and ethics

February 2010
A Historical Account of the Auditors role

19th early 20th Century, Great Britain and US: detailed scrutiny of clerical
data relating to the balance sheet.
the Joint Stock Companies Act 1844: all companies to make their book
available for critical analysis of shareholder meetings.
the Companies Act 1979: all limited liability companies to submit to auditing
Early 20th Century, US: evolved from the more cumbersome British practise
into test audits, the demand for independent auditing, and more disclosure of
information from companies.
Before SEC, the US financial markets were under-regulated.
Stock market crash in 1929 causing the great depression. The Securities
Act (1933) and the Security Exchange Act (1934)

February 2010
PricewaterhouseCoopers Slide 2
A Historical Account of the Auditors role (cont)

Current environment late 20th early 21st century, improving the accuracy and
reliability of corporate disclosures and independent of auditing firm.
financial scandals at major corporations and conflict of interest in the
financial services industry (Enron like scandals)
Sarbanes-Oxley Act 2002:
- prohibits accounting firms from providing many consulting services for
the company they audit
- Requires audit committees to select and oversee the external auditor
- Strengthen the independency requirement of auditor from their client
- Establish Public Company Accounting Oversight Board (PCAOB)
Statement of Auditing Standard (SAS) No. 99:
- Improve auditing practise relating to auditors role in detecting fraud in
the audit.

February 2010
PricewaterhouseCoopers Slide 3
Financial Audit vs Investigative Audit

Form an opinion on the overall Determine the likelihood and/or

financial statements taken as a magnitude of fraud occurring
Sufficient predication that a fraud
Purpose Usually required by third party
has or may have occurred
users of financial statements
Adds credibility to reported Resolve suspicions and
Value financial information accusations; determines the facts
Inquiry, observation, Review detailed financial and
examination, and re- non-financial data, search public
Source of performance of accounting records, conduct fact finding as
Evidence transactions to support financial well as admission-seeking
statement assertion interviews, including third party
Sufficiency of inquiries
Routine, doesnt interfere
evidence companys operation Establish fact to support or refute
suspicions or accusations

February 2010
PricewaterhouseCoopers Slide 4
Financial Audit vs Investigative Audit (Cont)

Timing Audits are conducted on regular Conducted only with sufficient

or recurring basis. predication.
General examination of
Conducted to resolve specific
Scope financial data.

Fraud examinations, because

The audit process is non-
Relationship they involve efforts to affix blame,
adversarial in nature
are adversarial in nature

Conducted by examination
Methodology Audits are conducted primarily
by examining financial data documents; review outside data
such as public records;
Presumption Require to approach audits with
professional skepticism Establish sufficient proof to
support or refute allegation of

February 2010
PricewaterhouseCoopers Slide 5
Before an investigation process: at a glance

Predication, the totality of circumstances that would led a reasonable,

professionally trained, and prudent individual to believe a fraud has
occurred, is occurring, or will occur.
Investigation processes, a fraud theory approach. Begin with assumption,
based on known facts, of what might have occurred. Then that assumption
is tested through the following steps:
- Analyse available data
- Create a hypothesis
- Test the hypothesis
- Refine and amend the hypothesis
Complete the investigation through multiple techniques: interviews,
document examination, and observations.

February 2010
PricewaterhouseCoopers Slide 6
Psychology of the fraudster: a brief intro

Calculating Criminals, who want to compete and to assert themselves;

they are predators, tend to be repeat offenders. They have higher-then-
average intelligence and relatively well educated.
Situation-dependent criminals, who are desperate to save themselves,
their families, or their companies from a catastrophe.
Power Brokers, a combination of the above where these people gained
their power as leaders in businesses and abused their position for personal

February 2010
PricewaterhouseCoopers Slide 7
Circumstances that Allow Fraud to Occur (the fraud triangle)

An atmosphere of anonymity and

distrust can increase the likelihood
of fraud. People who do not identify
with the organisation or are
disgruntled may have the
Insufficient controls, Incentive/Pressure necessary motivation.
poor monitoring,
poor management
practices and
collusive practices.
Career disappointment,
Rationalization/ lack of awareness of
Opportunity wrongdoing, self-denial
of consequences,
maintaining an
expensive lifestyle and
national business
February 2010
PricewaterhouseCoopers Slide 8
Qualities of forensic accountant / fraud investigator

Creative, see things that others are not able to see

Curious, always want to know more
Persistence, never give up! There is always a way
Common sense, be sensible, think of possibilities
Business sense, have understanding on business processes
Confidence, trust his/her abilities and his/her work. Therefore, he/she is
able to face the cross examination

February 2010
PricewaterhouseCoopers Slide 9
Professional Standard and Practises

Independent and Objectivity

- Attitude & Appearance, Objectivity
- and Organisational relationship
- Skills, Knowledge, Abilities and Experience
- Continuing education
- Code of ethics
Fraud Examinations
- Due professional care
- Planning & supervision
- Evidence
- Reporting

February 2010
PricewaterhouseCoopers Slide 10
Code of Ethics (Association of Certified Fraud Examiners Code
of Professional Ethics)

Shall, at all times, demonstrate a commitment to professionalism and

diligence in performing his/her duties;
Shall not engage in any illegal or unethical conduct, or any activity
which would constitute a conflict of interest;
Shall, at all times, exhibit the highest level of integrity in the performance
of all professional assignments, and will accept assignments which has
reasonable expectation that the assignment will completed with
professional competence;
Will comply with lawful orders of the courts, and will testify to matters
truthfully without bias and prejudice;
In conducting examinations, will obtain evidence to establish a
reasonable basis for any opinion rendered. No opinion shall be
expressed regarding the guilt or innocence of any person or party;

February 2010
PricewaterhouseCoopers Slide 11
Code of Ethics (Association of Certified Fraud Examiners Code
of Professional Ethics) cont

Shall not reveal any confidential information obtained during a

professional engagement without proper authorisation;
Shall reveal all material matters discovered during the course of
examination, which, if omitted, could cause a distortion of the facts
Shall continually strive to increase the competence and effectiveness of
professional services performed under his/her direction.

February 2010
PricewaterhouseCoopers Slide 12
Thank You

Professional scepticism is an attitude that includes a

questioning mind and a critical assessment of audit evidence

SAS 99 par 13.