The External Auditor’s Responsibility in Discovering Fraud

The external auditor’s responsibility in discovering fraud

According to the American Institute of CPAs (AICPA), “[t]he auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.” There are internal and external auditors. The responsibilities and conduct of audits by internal and external auditors differ in one important way. The internal auditor can be employed by the business or outsourced and they report directly to the management or the board of directors. The external auditor is an outside firm of accountants who are registered auditors and they report to the shareholders and board of directors.

In the past, most companies relied on the auditors from their audit firm to consolidate accounts, prepare adjusting journal entries, and writing their financial statements. Relying on the audit firms made sense to save money and time but a huge need for auditor independence came about during the last decade when so many publicly traded companies began to rise fraudulent and misleading statements because of conflict of interest.

Under the Sarbanes-Oxley Act (SOX), as well as the American Institute of CPAs and regulatory guidelines issued by the Securities Exchange Commission, the, the General Accounting office and the U.S. Department of Labor, it became a new requirement that auditors be independent to keep the confidence of users relying on their reports. External auditors that report on company financial statements are supposed to be independent. Although, they are paid fees by the company, they are adequately independent to conduct audits that outsiders such as shareholders or interested shareholders can rely on for decision-making.

External auditors rely on internal auditors when using the audit risk model to assess control risk. If internal auditors are effective, the external auditors can significantly reduce...