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Numerous examples of financial statement fraud and alleged auditor negligence'have been disclosec over the past 15 months-WorldCom/Arthur Andersen, Xerox/KPMG, Enron/Arthur Andersen, Adelphia Communications/Deloitte & Touche, Baptist Foundation of Arizona/Arthur Andersen, to name a few. Many have asked "Where were the auditors?" great number of people, it seems, believe that one of the primary focuses of an audit is to detect fraudulent financial reporting. It is important to continue educating financial statement users of the fact that the responsibility to prevent fraud remains with man agement, and not with the auditors.
In October 2002, the AICPA's Auditing Standards Board issued Statement on Auditing Standards No. 99, titled Consideration of Fraud in a Financial Statement Audit. The purpose of this standard is to "establish standards and provide guidance to pop- auditors in fulfilling their responsibility as it relates to fraud in an audit of financial statements conducted in accordance with generally accepted auditing standards." The new standard does not mandate that all auditors become forensic auditors, but it does require that the audit approach now include an increased emphasis on identifying financial statement fraud.
This article describes SAS No. 99 and presents the authors` comments on the difficulties and expected problems of applying it to private company audits. No
Overview
SAS No. 99 begins with a brief overview of its nine sections. Two of the sections provide descriptive information. The first details the nature and characteristics of fraud relevant to financial statements. The second elaborates on the auditor's requisite documentation. A third section provides guidance on communication between the auditors and management, the audit committee, and others. The remaining six sections detail the specific requirements applicable to a particular audit engagement.
The new standard blends a big picture orientation-- as illustrated in its discussion of the general characteristics of fraud-with specific detailed audit procedures, such as "The auditor should perform analytical procedures related to revenue."
The new standard addresses auditors' concerns regarding fulfilling their responsibility to determine if a client's financial statements are free of material misstatement due to fraud. Specifically, the standard provides detailed information on the nature and characteristics of fraud. It also illustrates how professional skepticism should be evident in all aspects of the audit; explains standard procedures that should be used to...