The Error of Relying on the End of Year Financial Statement Auditor
Entities that rely on the End of Year Financial Statement Audit as the sole method to detect and prevent fraud, experience greater fraud losses. The duration of the fraud (the amount of time from when the fraud commenced to time the fraud is detected) is longer since the entity relies on the end of year financial statement audit exercise instead of practicing proactive methods to detect fraud during the year.
The financial statement auditor is concerned with fraud that causes a material misstatement in the financial statements. |
Certified Fraud Examiners (CFEs) are concerned with detecting all forms of fraud, mitigating the risk of fraud and reducing fraud losses and fraud duration. Certified Fraud Examiners concentrate their efforts on early detection of fraud, deterrence of fraud, investigating and resolving allegations of fraud, and fraud prevention. |
The auditor’s ability to detect a fraud depends on factors such as the skillfulness of the perpetrator, the frequency and extent of manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved. While the auditor may be able to identify potential opportunities for fraud to be perpetrated, it is difficult for the auditor to determine whether misstatements in judgment areas such as accounting estimates are caused by fraud or error.
An analysis of instances of undetected material misstatements of the financial statements resulting from fraud, and discussions with their auditors, indicated the aforementioned factors as reasons for the audit’s failure to detect material misstatements of the financial statements resulting from fraud. Discussions with these auditors also revealed that the auditors’ lack of specialized training in fraud detection resulted in: i. the auditor’s inability to properly analyse documents that were later found to contain evidence of fraud, ii. the auditor’s inability to recognize fraudulent documents, and iii. the auditor accepting false documents (such as false confirmations from external entities obtained by collusion), as reliable evidence. Discussions with the auditors also revealed that use of checklists and time constraints for the completion of the audit resulted in the auditors considering the responses as part of the procedures to complete the checklists to complete the audit instead of considering the responses within the context of: the overall business process or activity, information obtained from other sources, the entity’s activities and dealings with customers, suppliers, regulators and other stakeholders. Discussions with the auditors also revealed reliance on management’s integrity based on prior experience. |
Competencies of the Fraud Examiner
Certified Fraud Examiners are trained in the areas of: ✓ Financial Transactions & Fraud Schemes, ✓ Law, ✓ Investigation and ✓ Fraud Prevention & Deterrence. Certified Fraud Examiners are particularly trained to analyse documents which include: ✓ Examining Fraudulent Documents, ✓ Forensic Document Examinations, ✓ Handling Documents as Physical Evidence, ✓ Recognising Phoney Documents, ✓ Forgery, ✓ Counterfeit Printed Documents, ✓ Fingerprints etc. |
“ The 2016 ACFE Report to the Nations on Occupational Fraud and Abuse Global Fraud Study (“The Study”) found that detection methods that were not the result of efforts within the organization to detect fraud, such as external financial statement audits resulted in longer fraud duration and greater fraud losses. ”
The Study found that proactive anti-fraud efforts such as Independent Review and Monitoring of an Entity's Systems, Independent Review of an Entity's Transactions, Activities, Accounting Records and Account Reconciliations, IT controls, Inspection of Assets and Inventory Counts and Reconciliation, Internal Audit and Management Reporting and Analysis resulted in fraud losses that were 54% lower and had 50% shorter duration times.
AMCS assists entities develop and implement systems to prevent and detect fraud. Fraud Prevention and Detection services include:
✔ Fraud Prevention and Detection Advisory Services
✔ Fraud Investigation or Fraud Examination
✔ Independent Review and Monitoring Of An Entity’s Systems
✔ Inspection of Assets
✔ Inventory Counts and Inspection
✔ Cash Counts and Point Of Sale Reconciliations
✔ Investment Securities Counts and Inspections
✔ Trade Payables or Supplier Reconciliations
✔ Trade Receivables Reconciliations
✔ General Ledger Account Reconciliation
✔ Jamaica Tax Return Reviews
Contact AMCS Jamaica Limited