Fraud and the Role of the Auditor

Fraud and the Role of the Auditor Name Course: Professor Name: (April 10, 2012) Fraud and the Role of the Auditor Fraud Introduction Fraud is an intentional misrepresentation often caused by false accounting, prejudice and misappropriation of funds and other necessary materials within an organization. It usually occurs when the accountant is liable or said to have breached his or her contract through a false misrepresentation. Alternatively this occurs when there is some dishonesty mainly intended for some selfish gains. Fraud mainly has severe implications to the concerned party or organization as it causes some loss and in some cases it exposes such parties to some risks. This paper seeks to analyze the various concepts of frauds and the auditor’s role in it. In most cases, fraud is mainly caused by false misrepresentation of material facts within a given firm or entity. Such misrepresentation may be driven by selfish motives where the responsible party does so with an intention of maximizing his own selfish goals. In addition, fraud can sometimes occur through failure to disclose some material information. Mainly, the registered company is legally mandated to disclose their annual financial position to the public, a move which is aimed at helping the existing and potential investors in making up their own decisions. Material disclosure is also required when two parties intend to enter into a contract and it aims at letting either of the party to make a well-informed decision whether or not to enter into a contract. Failure to disclose information may lead to losses or expose the parties involved to a risk of loss (Wallace, 1994). Fraud may also occur through an abuse of a given position. This mainly applies to the people mandated to safeguard the financial interest of another person. And it occurs when the said party or individual abuses his or her own position for a selfish gain. Similarly, such an act may cause some loss or expose another into a risk of loss. The role of auditor in fraud Mainly, the auditor’s role is not to combat fraud within a given organization. However, he or she is responsible to plan and undertake financial audit which gives some reasonable assurance to the financial statements. Auditors are mainly supposed to reassure all the financial statement users that the statements are free from any material misstatements that may be caused by error or fraud, and which may have a severe implication to their decision making process. However, it should be noted that an auditor is not responsible for the detection of non-material misstatements. This is as required by SAS No. 82 which only requires auditors to detect and report only the material misstatement in the financial statements (Farrell & Franco, 1999). Auditors are required to detect frauds...