Risk of Fraud

Following the recent corporate governance scandals, external auditors were required to expand their procedures for detecting fraud. The AICPA issued a Statement on Auditing Standards 99: "Consideration of Fraud in a Financial Statement Audit."

This standard requires external auditors to interview key representatives of management and the governing board. The interviews are designed to identify areas that may be prone to fraud and understand how those risks have been mitigated.

The standard also requires additional testing for transactions that may indicate an attempt to misstate the financial statements. Auditors must report any evidence of significant fraud to the Audit Committee. Other questions that the Audit Committee members may pose to the external auditor, include:

  • What areas presented the greatest risk of fraud?
  • Are you satisfied that management has taken appropriate steps to protect the organization against fraud exposures?
  • Did management deal appropriately with any evidence of potential fraudulent activity?