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• W168435294 abstract "EXECUTIVE SUMMARY * CPAs CAN LEARN HOW TO BETTER DETECT financial statement fraud by understanding the mistakes others made in cases where the SEC imposed sanctions on auditors for their association with fraudulently misstated financial statements. This article focuses on 45 SEC enforcement actions against auditors in the period 1987 to 1997. * THE MOST COMMON PROBLEM, IN 80% OF THE CASES, was the auditor's failure to gather sufficient audit evidence. Many of the cases involved inadequate evidence in areas such as asset valuation, asset ownership and management representations. * IN ALMOST HALF OF THE ENFORCEMENT ACTIONS, the SEC alleged the auditors failed to apply GAAP pronouncements or applied them incorrectly. One way firms can deal with this problem is to expand the coverage of technical accounting topics in firm-sponsored training. * AUDIT PROGRAM DESIGN WAS A PROBLEM CITED in 44% of the cases. Auditors failed to properly assess inherent risk and adjust the audit program accordingly. The best way for a firm to remedy such deficiencies is to promote more involvement by audit firm executives--partners and managers--in planning the engagement. * OTHER COMMON AUDIT PROBLEMS INCLUDE FAILURE to exercise due professional care and the appropriate level of professional skepticism, overreliance on inquiry as a form of audit evidence, deficiency in confirming accounts receivable, failure to recognize related party transactions and assuming internal controls exist when they may not. How can CPAs learn to more effectively detect financial statement fraud? One of the best ways is to profit from the mistakes of others. The information presented here is based on cases in which the SEC sanctioned auditors for their association with fraudulent financial statements. Enforcement actions against auditors are rare, but the consequences of individual cases can be great and the cases offer the profession an opportunity to learn and grow. While the lessons presented here will be most valuable to practitioners who perform audits, CPAs employed by client companies may also benefit from understanding the process so they can develop realistic audit expectations. Our analysis is based on a report we completed in 2000 for the AICPA ASB titled Fraud-Related SEC Enforcement Actions Against Auditors: 1987-1997. Our research initially involved 56 cases. However, 11 of those 56 cases involved a bogus audit or auditor where either the audit never took place or a non-CPA posed as an auditor and issued a phony opinion. In the remaining 45 cases the SEC alleged deficiencies in performing one or more attempted audit engagements. These cases form the basis for our analysis. All of the cases involved public companies, most of which engaged in fraudulent financial reporting (or cooking the books). Only a few engaged in misappropriation of assets or defalcation (stealing). While the audit deficiencies described here may help CPAs detect or prevent either type of fraud, with private companies--where stealing is the more pervasive risk--auditors face an entirely different set of considerations. COMMON AUDIT PROBLEMS The exhibit on page 65 highlights the top 10 audit deficiencies the SEC claimed. The most common problem--alleged in 80% of the cases--was the auditor's failure to gather sufficient evidence. In some instances, this failure was pervasive throughout the engagement; in other instances the allegations were more specific. For example, many of the cases involved inadequate evidence in the areas of * Asset valuation. The auditor did not obtain evidence to support key assumptions. * Asset ownership. The auditor did not obtain evidence to indicate the company owned certain assets. * Management representations. The auditor did not corroborate management responses to inquiries. Some cases involved the auditor's failure to examine relevant supporting documents (for example, examining a draft, instead of a final, sales contract) or failure to perform steps listed in the audit program. …" @default.
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• W168435294 date "2001-04-01" @default.
• W168435294 modified "2023-09-23" @default.
• W168435294 title "Top 10 Audit Deficiencies" @default.
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