Audit: Detecting Fraud & Uncovering Financial Breach - Essay Sample

Introduction

Audits are done in cases where fraud is likely to have been committed. Auditing is an inspection of a procedure and the authentication of a system to put in check all processes of a system. It can be done to an entire firm or in specific situations where there is a hunch of bias. A forensic audit is therefore done to evaluate an organization's or even an individual's financial records to get to the root cause of a financial breach which in many cases than not are usually for legal proceedings.

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In the scenario, a forensic audit is usually conducted. This means the entire organization's financial records would be put under scrutiny for checks and balances. The company might be losing money through check forgery or issuance of bounced checks since the bank indicates that some customer's checks had been returned for lack of funds in their accounts (Anantharaman & Wans, 2019). One of the check fraud schemes that might have been used to swindle funds in such a case might be check kiting. This is whereby funds are deposited before the float period elapses. This helps the culprits buy time before anyone in the system notices there are no funds in the accounts.

Bad check writing is also another common scheme used in cases where there are strict regulations on how the money and checks are handled because the check cannot be negotiated. A written check is deposited to the store with a hope that there will not be suspicion of the check not clearing (Farrar, 2010). The buyer, therefore, shops knowing the check they have deposited is not valid. Since it is an inside job and these atrocities are covered by some of the workers in the store, it would be difficult to notice until a forensic audit is carried out.

Abandonment is another way of getting away with a check fraud but it is always noticed at the end of it all. A customer writes a check after shopping, the store cashier checks its validity and deposits it after without the knowledge o the fraud that is going on (Kuzmin, 2019). The customer may have funds in the account at the time but withdraws all of it later in cash before the check clears and then decide to abandon the account. This in many cases is noticeable but not quite prosecutable due to lack of strong evidence.

Curbing check frauds might not be as easy as dealing with them after detection. Why am I saying this? Employers use resumes and curriculum vitae during the recruitment and knowing an employee's intentions would not quite be easy (Rezaee, 2019). It is therefore advisable for employers to get to know their employees in-depth and be able to notice any change in their behaviors since fraud operators tend to show some traits that indicate their intentions.

Jacob Kent must make sure that the employees tasked with the signing of the company are not the same ones that reconcile the organization's account.

The bank statements from the organization should be checked regularly to notice trends and this will help notice any irregularities.

Having good business relations with other stores could keep Jacob Kent informed on any previous occurrences of fraud around that area. This alert makes sure his guard is up and all loose ends are tied to prevent such from befalling him.

In every company, there are rules that one must follow when preparing a report for the financial data. These rules are known as accounting principles. These rules in some cases allow the financial statements report to be altered under some principles (Zain et al., 2006). One of the principles is if the reason for the departure would lead to a misstatement on the financial reports. Generally Accepted Accounting Principles consist of wide methods and the dos or don'ts that stand for best accounting practices.

Preparing a financial report in adherence to GAAP ensures uniformity in that auditor checking the financial reports can easily compare performance either from previous records or competitors. GAAP follows four strict terms in ensuring transparency and efficiency in financial statements preparations.

The four basic constraints include objectivity, consistency, prudence, and materiality.

Prudence ensures that auditors use processes that lower the risks of overstatement of assets or the organization's income.

The principle of consistency makes sure the accountants and auditors apply the same accounting methods back to back and indicate in their financial statements if they change.

Materiality refers to the wholeness of the information from the audit. Auditors must report all their findings not minding whether the information might benefit other parties.

Objectivity binds the auditor and the accountants to independence. This means their work should not be influence by any party. This ensures transparency and honesty in the reports.

None of the options she has would be accepted per the Generally Accepted Accounting Principles because they are not under the rules of GAAP. Heather's financial statement would be compromised since she is taking advice from Yvonne who is not among the two accountants she works with preparing the audits. In addition to that she would risk overstating the firm's income since there are dealers who pulled out due to bankruptcy. Heather would have to alter that year's financial report because of Yvonne's concern on how Cathy would react to the news of a decline in earnings. This breaches the principle of materiality.

Financial Statement Fraud

This is deliberately misinterpreting a financial report to create another impression different from the actual on the financial statement users. It is usually achieved by leaving or misstating amounts on purpose. Yvonne asking heather to find a way to make the financial statement pleasing means she is considering alteration of figures to still create the illusion of a well-doing company.

If I were in Heather's position, I would strictly adhere to the principles of Accounting keeping in mind the principle of materiality which encourages auditors to include everything in their report even if it would not be in their favor. It would be better if the trustee knew the exact current situation of the firm in case things don't work out to avoid future complications which would, of course, be dire.

Initial Public Offering is a way in which most private companies raise capital from public investors. To able to do this it would mean they have to offer shares of their private company to the public which means they would also go public. According to the SOX 404 compliance act, there are certain measures private sector companies would have to take to be considered. The Sarbanes-Oxley Act (SOX 404) is a law that requires public companies to assess theirs in house control of financial reports. It requires companies' auditing teams to account for and make reports on the management. It would be impossible for the three-member company to become sox 404 compliant since they are required to hire independent auditors for inspection of the yearly financial statements.

Compliance

The first step to becoming SOX 404 compliant is ensuring that there are enough resources and employees to deal with the units of the business as far as financial reports are concerned. Next, their company should have predictable yearly procedures that see to SOX audit. This gives wider understandings to the in house auditing process and necessities for compliance.

Conclusion

Development of a detailed Human resource according to the skills required to carry out a SOX audit should be next on the list. This entails the hiring, training, developing and effective positioning of the employees to specialists in the internal control. Running a SOX 404 compliant company is a job that entails several duties and functions that would be impossible to be managed by only three people. This means there must be the recruitment of other personnel to ensure effective management and efficiency in the work. The compliance act helps companies avoid losses and evaluate their progress.

References

Anantharaman, D., & Wans, N. (2019). Audit Office Experience with SOX 404(b) Filers and SOX 404 Audit Quality. The Accounting Review, 94(4), 1-43. https://doi.org/10.2308/accr-52275

Farrar, F. (2010). Role and Function of the Public Company Accounting Oversight Board and Auditing Standard No. 5 an Audit Internal Control Over Financial Reporting that Integrated with an Audit of Financial Statements. SSRN Electronic Journal, 21(11). https://doi.org/10.2139/ssrn.1564410

Kuzmin, A. (2019). Issues of Hedge Accounting in IFRS in Consolidated financial Statement. Accounting. Analysis. Auditing, 6(1), 40-49. https://doi.org/10.26794/2408-9303-2019-6-1-40-49

Rezaee, Z. (2019). Forensic Accounting and Financial Statement Fraud (2nd ed.). Business Expert Press.

Zain, M., Subramaniam, N., & Stewart, J. (2006). Internal Auditors' Assessment of their Contribution to Financial Statement Audits: The Relation with Audit Committee and Internal Audit Function Characteristics. International Journal Of Auditing, 10(1), 1-18. https://doi.org/10.1111/j.1099-1123.2006.00306.x