The recent financial crisis, both worldwide and domestic, increases the incentive for company management to “Cook the books”, or, in other words, to present fraudulent financial reports. This is due to the pressure from both investors to show good results, but also from creditors to remain a reliable debtor in their eyes. The object of this thesis is therefore to identify the risks involved in finding and acting accordingly to fraudulent financial reports as an auditor. To achieve this, I’ll be using RS 240 (revised) as a basis to analyze how the review done by the auditors, can be improved in terms of preventing fraudulent behavior, or to communicate the areas not included in the auditor’s responsibility to the external users. The international financial reporting standards allows for many accounting fair value estimates, and it falls upon the daily management to perform most of these estimates. The extent of these estimates, will inherently increase the risk of errors in the financial report, which might be initiated intentionally by the management, and thus be fraudulent. Thus it’s up to auditor to judge, upon the documentation given by the management, if the estimates seem reliable and probable. The theory puts the auditor in the “agent/principal theory” to, on behalf of the principal, to monitor the agent’s behavior, as a cost-effective alternative to the principal to monitor the agent himself. This is empathized further by stating that the external user expectation of the auditors has to be aligned with what the auditor does, otherwise their work has little to no value. RS 240 (revised) serves to set guidelines for how to deal with fraud when auditing financial reports, and while the responsibility for the financial reports still lies with the management, the auditor still provides assurance that the report as a whole contains no substantial errors, which includes fraud. But despite the joint responsibility insinuated in RS 240 (revised), it’s not entirely clear what precisely the responsibility include. The solution seems to be, to require education for the management, accordingly to the accounting estimates they’re responsible for in the financial report. This would both partly remove the excuse of the management claiming ignorance when uncovering significant errors, but also give the auditor better assurance of the estimates provided by the management, thus reducing the risk of fraudulent behavior.
|Educations||MSc in Auditing, (Graduate Programme) Final Thesis|
|Number of pages||83|