AICPA Issues Proposed Standard On Fraud Detection

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On February 28, 2002, the American Institute of CPAs (AICPA) released a draft of a revised audit standard on Consideration of Fraud in a Financial Statement Audit. If adopted, this updated standard will replace the current standard with the same name, (Statement on Auditing Standards No. 82). The proposed update provides auditors with additional guidance designed to improve the likelihood that audits will detect material misstatements of financial statements due to fraud.

Several additional audit steps would be required under the proposed standard, including the following:

  • Audit teams will need to discuss among themselves their thoughts about how and where the entity's financial statements might be susceptible to material misstatement due to fraud. The expectation is that this will help to increase their focus on professional skepticism.
  • Auditors will be required to make certain specific inquiries of management, audit committees and internal auditors about the risks of fraud. Management will also be asked about its knowledge of fraud or allegations of fraud and the steps taken to mitigate fraud risks, including communications to employees about business practices and ethics.
  • Auditors will generally be required to make certain substantive tests on audits of public entities in response to a risk of management override that cannot be addressed through reliance on traditional controls. An example of this type of test is the review of nonstandard journal entries. The proposed standard also provides circumstances under which these tests might not be needed on audits of nonpublic entities.

The proposal is part of a broader AICPA program to address the growing concerns about fraudulent financial reporting. It responds to recommendations made by a Panel on Audit Effectiveness appointed by the Public Oversight Board at the suggestion of the Securities and Exchange Commission. It also takes into consideration the results of five academic projects sponsored by the AICPA and the guidance issued by the International Federation of Accountants (ISA 240) in the spring of 2001. Follow-on initiatives will focus on the prevention and deterrence of fraud as well as its detection.

Comments on the exposure draft are due by May 31, 2002. If adopted as proposed, the revised standard would be effective for 2003 audits.

-Rosemary Schlank

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