The Role of Internal Auditing in Fraud Prevention and Investigation

THE ROLE OF INTERNAL AUDITING IN FRAUD PREVENTION AND INVESTIGATION.

INTRODUCTION.

Internal auditing is charged with the overall responsibility of reviewing, evaluating and monitoring the organization’s internal controls to ensure efficiency. Its functions include a detailed testing of transactions and balances, and performing routine or sometimes, random checks as a precautionary measure.

During this process, an auditor might uncover fraudulent practices, which would otherwise have gone unnoticed. This paper intends to clarify the difference between auditing and fraud investigation, fraud indicators, highlight the role of audits in fraud prevention and investigation.

THEORETICAL FRAMEWORK AND CONCLUSION.

Paul A. Rodrigues said, “It has been aptly said that auditors look at the ‘donut’ and fraud examiners look at the ‘hole’” (Auditing vs. Fraud Examination, para. 2). That statement indicates a difference between auditing and fraud investigation; audits are reoccurring (on a regular basis), fraud investigations are not (only when there is sufficient predication); an audits scope is general, that of fraud investigations are specific (allegation based); an audit’s objective is to express a general opinion, a fraud examination’s is to affix blame where an allegation is confirmed (adapted from the ACFE Fraud Examiners Manual).

That being said, an internal audit is party to a fraud investigation along side forensic investigators, legal counsel, law enforcement and the lot. According to the Association of Fraud Examiners 2002 Report to the nation, internal audits uncovered almost 19% of reported frauds in 2002. They also stated that companies with Internal Audit department suffer about half the losses as those without one (John Cherpock, Internal Audits role in identification and investigation of frauds, para. 14). During financial or operational audits, an auditor might come across certain fraud indicators, which if followed up on with appropriate measures,...