MISCONCEPTION BETWEEN

TRADITIONAL AUDIT AND FRAUD

AUDIT

Associate Professor Dr. Razana Juhaida Johari C.A (M)

Department of Professional Accountancy Programme
Faculty of Accountancy, Universiti Teknologi MARA,
Selangor, MALAYSIA

WEBINAR REPOSITIONING TRADITIONAL AUDIT, FRAUD AUDIT DAN FORENSIK AUDIT DALAM
KONTEKS AKUNTABILITAS
Universitas Riau, Pekanbaru, INDONESIA
21 July 2020
 Items to be discussed:
1. The emergence of auditing assurance

2. Auditor’s responsibility

3. Traditional audit v/s Fraud audit

4. Procedure for a fraud audit investigation

5. Fraud audit investigative techniques

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1.0 The emergence of auditing assurance
Business, financial and investment decisions must be based on
true, exact and accurate financial reporting information in
order to be correct and successful.

The need of confirmation of the aforementioned

characteristics of financial reporting outputs, from the
viewpoint of external and internal users of financial
statements and the needs of the decision-making
process, has led to the emergence of auditing.

The expansion of major financial scandals, in the

ever-growing number of frauds in previous
decades, as well as the very substantial amounts of
damages caused by frauds, has made an entrance
for fraud/fraud audit.

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 2.0 Auditor’s responsibility

• Auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether caused by error or
fraud.

• Due to the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain
reasonable, but not absolute, assurance that material misstatements are detected.

• A fair reading of this conceptual description of responsibility is that the auditor is required to obtain
reasonable assurance that frauds which materially misstate the financial statements are detected.
In other words, it is clearly a responsibility related to fraud detection.

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 2.0 Auditor’s responsibility (cont.)
• However, the revelations of huge financial scandals disgrace the auditing professions
• Auditors are blamed of not uphold the public trust and failed to detect a massive mis-
statement of financial statements caused by fraud.

• When this happen, the defensive refrain is often that “an audit of financial statements is not a
fraud audit.”

• This comparison improperly…

 Implies that an auditor of financial statements has no responsibility to detect fraud and erodes
the public’s confidence in the quality and usefulness of independent audits.

 Mislead those evaluating the auditor’s conduct after a major undetected fraud, such as BOD &
audit committees considering reappointment, judges and juries deciding liability, and even
audit firms themselves evaluating their own liability and determining whether firm policies and
procedures ought to be revised.

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 3.0 Traditional audit v/s Fraud audit (Vukadinovic et al., 2015)
THE DIFFERENCES BETWEEN TRADITIONAL AUDIT AND FRAUD AUDIT

Elements of Traditional Audit Fraud audit

differences
1. Legislation Legal and professional Professional regulations
2. Objective Expression of professional, Prevention, investigation and
independent and competent opinion on detection of fraud
the truthfulness, correctness and
accuracy of financial statements
3. Limitations Limited by professional standards Not limited by external audit
beyond which it does not perform standards and can perform
further checks professional activities outside the
standards
4. Materiality Very important It is not important because it
determines the amount of damage
of the fraud regardless of the
amount of damage
5. Period of activity Expression of opinion on the financial No specific timeline, activity lasts
statements for one business year until the fraud is discovered
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3.0 Traditional audit v/s Fraud audit (cont.) (Vukadinovic et al., 2015)
THE DIFFERENCES BETWEEN TRADITIONAL AUDIT AND FRAUD AUDIT

6. Methodology Based on the sampling method Investigate every financial transaction

which is connected to fraud
7. Investigation Do not investigate One of the main activities
8. Reporting Provides independent, professional Specialized report containing the
and competent opinion in the form elements of the offense of fraud and is
prescribed by the International intended for legal proceedings and
Auditing Standards there is no generally accepted
standards prescribed
9. The court Expert auditor may be a witness in Th e fraud auditor is required as a
proceedings court witness in court in the role of expert
10. Method of In the normal course and plan-review Alert, doubt, request the client and
detecting fraud other ways
11. Obligation Mandatory process for public It is not a legal obligation
companies

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Key differences(2017 ACFE Fraud Examiners Manual).
:
• The services between the trad. audit & fraud audit are distinctly
different, and are planned and performed to accomplish unique
purposes.

1. Predication
• Fraud examiners should begin a fraud examination only when there are
circumstances that suggest a fraud has occurred, is occurring, or will
occur, and they should not investigate beyond the available predication.
• An audit of financial statements is undertaken with a different mindset;
suspicion of fraud is not necessary. The audit team is required to
identify how and where the financial statements may be susceptible to
material misstatement due to fraud.

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Key differences:
2. Objective
•The basic goal for most fraud examinations is to determine whether
fraud occurred, and if so, who perpetrated it. A particular
engagement may, however, have additional goals, such as to
establish and secure evidence to be used in a criminal or other
disciplinary action or to provide proof to recover losses from an
insurer.
•The objective in an audit of financial statements is to determine
whether they are free of material misstatement, regardless of
whether that misstatement is intentional or not; in other words, a
fraud examiner’s priority is proving the nature and extent of a
particular fraud, but an auditor’s focus is detecting material
misstatements.
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Key differences:
3. Scope
•A fraud examiner’s is established by the specific allegations of
fraud, targeted to specific accounts implicated by the predication,
and has the objective of resolving the allegations by obtaining
evidence that proves or disproves fraudulent activity.
•An auditor’s selection of significant accounts to examine is
based on the assessment of the risks of material misstatement
caused by either fraudulent activity or unintentional
misstatement. Accordingly, an auditor’s work is significantly
affected by the concept of materiality, but a fraud examiner’s
scope is not so constrained.

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Key differences:
4. Methodology & applicable professional standards.
•A fraud examiner can reach an understanding with the client
(or employer) about the scope and limitations of the fraud
examination that limits the area at issue and establishes the
boundaries or extent of the investigation.

•An auditor cannot contract away responsibility to adhere to the

auditing standards. When an auditor represents that the audit
has been performed in conformity with auditing standards, no
provision in an engagement letter can alleviate the duties
imposed by the standards.

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 4.0 Procedure for a fraud audit investigation

• A fraud auditor is required to have special training in fraud audit

techniques and in the legalities of accounting issues.
• A fraud audit has additional steps that need to be performed in addition
to regular audit procedures.

• 4 procedures:
(1)Plan the investigation
– When the client hires a fraud auditor, the auditor is required to
understand what the focus of the audit is. For example, the client might
be suspicious about possible fraud in terms of the quality of raw
materials supplied.
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4.0 Procedure for a fraud audit investigation (cont.)

• The fraud auditor will plan their investigation to achieve objectives

such as:
Identify what fraud, if any, is being carried out
Determine the time period during which the fraud has occurred
Discover how the fraud was concealed
Identify the perpetrators of the fraud
Quantify the loss suffered due to the fraud
Gather relevant evidence that is admissible in the court
Suggest measures that can prevent such frauds in the company in future

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4.0 Procedure for a fraud audit investigation (cont.)
(2) Collecting Evidence
•By the conclusion of the audit, the fraud auditor is required to understand the
possible type of fraud that has been carried out and how it has been
committed.
•The evidence collected should be adequate enough to prove the identity of
the fraudster(s) in court, reveal the details of the fraud scheme, and document
the amount of financial loss suffered and the parties affected by the fraud.
•A logical flow of evidence will help the court in understanding the fraud and
the evidence presented. Fraud auditors are required to take precautions to
ensure that documents and other evidence collected are not damaged or
altered by anyone.

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4.0 Procedure for a fraud audit investigation (cont.)

• Common techniques used for collecting evidence in a fraud audit

include the following:
• Substantive techniques – For example, doing a reconciliation, review of
documents, etc
• Analytical procedures – Used to compare trends over a certain time period
or to get comparative data from different segments
• Computer-assisted audit techniques – Computer software programs that
can be used to identify fraud
• Understanding internal controls and testing them so as to understand the
loopholes which allowed the fraud to be perpetrated.
• Interviewing the suspect(s)
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4.0 Procedure for a fraud audit investigation (cont.)

(3) Reporting
•A report is required so that it can be presented to a client about
the fraud.
•The report should include the findings of the investigation, a
summary of the evidence, an explanation of how the fraud was
perpetrated, and suggestions on how internal controls can be
improved to prevent such frauds in the future.
•The report needs to be presented to a client so that they can
proceed to file a legal case if they so desire.

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4.0 Procedure for a fraud audit investigation (cont.)
4. Court Proceedings
•The fraud auditor needs to be present during court proceedings to explain the evidence
collected and how the suspect was identified.
• They should simplify the complex accounting issues and explain in layman’s language so
that people who have no understanding of the accounting terms can still understand the
fraud that was carried out.

To summarize:
A fraud audit is a detailed engagement that requires the expertise of not only
accounting and auditing procedures but also expert knowledge regarding the legal
framework.
A fraud auditor is required to have an understanding of various frauds that can be
carried out and of how evidence needs to be collected.

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 5.0 Fraud audit investigative techniques
1.Reviewing Public Documents and Doing Background Checks
•The documents made available to the public are scrutinised as they are the easiest to obtain.
•Thorough background checks of a particular company are done to see the past dealings of
the business.
2.Conducting Interviews
•An essential technique which can transform an unwilling person into a source of valuable
information - It helps in fully understanding all the facts.
•An interview should be conducted by accurately assessing the situation and preparing the
questions according to it.
•Discussions should take every little detail into account and look at the greater picture to
figure out the magnitude of the illegal activity and the culprit responsible.

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 5.0 Fraud audit investigative techniques (cont.)
3.Gathering Information from Trustworthy Sources
•Information provided by a confidential and trustworthy source can be precious to any
case.
•All the necessary precautions should be taken to hide the identity of the
source/informant.
•A fraud accountant should try to have as many confidential sources possible because
such sources can virtually guarantee a correct result.

4.Analysing Evidence
•Proper analysis of the obtained evidence can point to the guilty party and can also
assist to understand the extent of the fraud committed in the business.
•This analysis help in understanding how secure the company is against financial fraud
and installing various severity measures to prevent any such future situation.

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 5.0 Fraud audit investigative techniques (cont.)
5.Surveillance
•This can be done physically or electronically and is one of the conventional measures
conducted to uncover any fraud.
•It can be done by monitoring and tracking all the official emails and messages.

   

6.Going Undercover
•This is an extreme measure and should be used only as a last resort.
•It is best left to the professionals as they have the proper knowledge of how and
where to conduct the investigations.
•Even a small mistake while being undercover can signal the offender that something
is wrong and the person might disappear.
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 5.0 Fraud audit investigative techniques (cont.)

7.Analysing the Financial Statements

•This is a precious tool for finding out the fraud committed.
•All the necessary details are summarised in the financial statement, and the analysis
of these statements can help a fraud accountant to figure out the fraud.
•Nowadays the economic conditions are getting stricter, and each country’s
government is now implementing tighter laws in terms of the governance of the
businesses.
•As the companies are increasing the level of sophistication, so is fraud.

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 6.0 Conclusion
• Financial reporting is one of the most important factors affecting the overall
business, in particular investment decision making.

• Traditional/external audit aims to determine accuracy and objectivity of financial

statements, i.e., disclosure of funds, resources and business performances in the
financial statements, and to form an opinion based on the information provided.

• Therefore, the purpose of external traditional audit is not fraud detection that
frequently appears in the background of an incorrect, unfair and unlawful
presentation of financial statements.

• The answer to this need is the fraud audit, which differs from external audit in
terms of its goals and character.

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