Auditing standards require financial statement auditors to identify and assess the risks of material misstatement due to fraud — and to determine overall and specific responses to those risks. Here’s why face-to-face meetings are essential when assessing these risks.
Fraud-related questions are a critical part of the audit process. The American Institute of CPAs (AICPA) requires auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks under Clarified Statement on Auditing Standards (AU-C) Section 240, Consideration of Fraud in a Financial Statement Audit.
Specific areas of inquiry under AU-C Section 240 include:
- Whether management has knowledge of any actual, suspected, or alleged fraud
- Management’s process for identifying, responding to, and monitoring the fraud risks in the entity
- The nature, extent, and frequency of management’s assessment of fraud risks and the results of those assessments
- Any specific fraud risks that management has identified or that have been brought to its attention
- The classes of transactions, account balances, or disclosures for which a fraud risk is likely to exist
- Management’s communications, if any, to those charged with governance about its process for identifying and responding to fraud risks, and to employees on its views on appropriate business practices and ethical behavior.
Interviews must be conducted for every audit — auditors can’t just assume that fraud risks are the same as those that existed in the previous accounting period.
Although many audit procedures have been done remotely during the pandemic, auditors are now resuming face-to-face meetings with managers and others to discuss fraud risks. Why? Psychologists estimate that 7% of communication happens through spoken word, 38% through tone of voice, and 55% through body language. So, when evaluating fraud risks during an audit, a face-to-face interview is critical to help pick up on nonverbal clues.
Nuances such as an interviewee’s tone and inflection, the speed at which he or she responds, and body language provide important context to the words being spoken. The auditor also will watch for signs of stress on the part of the interviewee in responding to questions, including long pauses before answering, starting answers over, profuse sweating, or tapping feet.
In addition, in-person interviews provide opportunities for immediate follow-up questions. When it isn’t possible to have a face-to-face interview, a videoconference or phone call is the next best option because it provides the auditor many of the same advantages as meeting in person.
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External audits don’t provide an absolute guarantee that dishonest behaviors will be detected, but they can be an effective antifraud control. According to Occupational Fraud 2022: A Report to the Nations, companies that were audited lost one-third less from fraud than those that weren’t audited — and audited companies were able to detect fraud 33% faster than those without audited financial statements.
You can facilitate our efforts to assess your company’s fraud risks by anticipating the types of questions we’ll ask and the source documents we’ll need. Forthcoming, prompt responses help ensure that your audit stays on schedule and reduces any unnecessary delays.