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SIGNALS POINT TO POTENTIAL FRAUD
IN BRIEF
External Auditors Can Partner with Internal Auditor
Recognizing the mandated role of internal auditors and leveraging the important fraud-related information that resides with the client's internal audit personnel can improve the effectiveness of the external audit. The extent to which internal auditors are sensitive to warning signs that might indivate the possibility for fraud demonstrates how much internal auditors can help external auditors. Internal auditors that can provide advance notice of fraud risk can be effective partners in the prevention and detection of fraudulent financial reporting. The authors' research indicates that internal auditors attach the same importance to warning signs as external auditors; however, they also tend to emphasize attitude or rationalization factors and not consider corporate governance characteristics a highly.
The AICPA's recently issued SAS 99. Consideration of Fraud in a Financial Statement Audit, directs external auditors to ask a company's internal audit personnel about the risk of fraud and any knowledge of actual or suspected fraud. The impetus for this directive comes from the important role internal auditors play in corporate governance. As recognized by the Treadway Commission Report in 1987, internal auditors are expected to assume an active role in preventing and detecting fraudulent financial reporting.
If internal auditors are adept in recognizing the factors that signal the likelihood of fraud, an active partnership between external and internal auditors could be beneficial for all stakeholders. If internal auditors tend to emphasize or ignore certain factors, CPAs should be aware of such potential biases and take that into consideration when coordinating with the client's internal auditors.
Fraud Conditions
According to SAS 99, three fundamental conditions are generally present when fraudulent financial reporting occurs: 1) incentive or pressure to perpetrate fraud, 2) an opportunity to carry out the fraud, and 3) attitude or rationalization to justify the fraudulent action. Within each of the three fundamental conditions, there are...