1 THE AUDITORS’ ROLE IN DETECTING AND PREVENTING FRAUD DO THU TRANG BACHELOR OF BUSINESS (MARKETING) HONS HELP UNIVERSITY COLLEGE OCTOBER 2011 2 THE AUDITORS’ ROLE IN DETECTING AND PREVENTING FRAUD BY DO THU TRANG Graduation Project Submitted to the Department of Business Studies, HELP University College, in Partial Fulfilment of the Requirements for the Degree of Bachelor of Business (Marketing) Hons OCTOBER 2011 3 Declaration of Originality and Word Count DECLARATION I declare that this graduation project is based on my original work except for quotations and citation which have been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other courses/degrees at HELP University College or other institutions. Word Count: 10,491 words Do Thu Trang Date: October 17, 2011 4 Acknowledgements This study wouldn’t have been performed without the help of helpful people. Sincere thanks to my supervisor, Mr. Nguyen Hong Quan for his support, guidance and vision for all my study. Sincere thanks to Ms. Minh – a senior manager of Ernst and Young Company for helping me conduct survey quickly and effectively. 5 Abstract THE AUDITOR’S ROLE IN DECTIONING AND PREVENTIONING FRAUD By DO THU TRANG October 2011 Supervisor: Mr. Nguyen Hong Quan Do you think that the task of the auditor is responsible to detect fraud in the corporation they inspect? Large amount of people think they are. Task of auditors is to prevent, detect and report fraud, dishonest acts and other errors. It is one of the most controversial issues in the audit. My study reports the result of a analysis to find out the level of awareness of fraud and perceptions of auditors' responsibility of the users of financial statements in detect fraud and other auditing procedures concerned. Research also shows that people have misconception about the objective of the audit. Because of the number of respondents, higher expectation was placed on the duties of auditors in detect and report fraud than the requirements of regulations or standards of auditing. The results of this research show that cannot doubt the existence, with respect to detecting fraud, of a gap between the perception of the respondents and the present standard requirements for auditors. 6 TABLE OF CONTENTS Page Declaration of Originality and Word count………………………………… ……….3 Abstract……………………………………………………………………… ……….4 Acknowledgements…………………………………………………………… …… 5 Table of Contents………………………………………………… ………… …… 6 CHAPTER 1: INTRODUCTION 1.1. Research Background……………………………………………………… … 10 1.2. Problem Statement……………………………………………………… ………10 1.3. Objectives and Sphere of Research………………………………………… ……12 1.3.1. Objectives of Research…………………………………….…… …… 12 1.3.2. Sphere of Research……………………………………… 12 1.4. Research Methods……………………………………………………… ….…… 12 1.5. Structure of Research…………………………………………………………… 13 CHAPTER 2: LITERATURE REVIEW 2.1. Definition of fraud……………………………………………………………… 15 2.1.1. Distinguish between fraud and errors…………………………………… 18 2.1.2. How fraud occurred……………………………………………………… 19 2.2. Auditor’s responsibilities in fraud detection and prevention…………………… 20 7 2.2.1. Detecting fraud: What are the roles of external and internal auditors? 22 2.2.1.1. External auditors’ role…………………………………………………22 2.2.1.2. Internal auditor’s role…………………………………………….… 24 2.2.2. Role of auditor in preventing fraud………………………………………….29 2.3. The company applies internal control to detecting and preventing fraudulent activities…………………………………………………………………………………32 2.3.1. How internal auditors used internal control? 34 2.3.2. How external audit use internal control? 36 2.4. Reasons why auditors fail to detect fraud…………………………………… ……36 2.5. Empirical studies on fraud detection…………………………………………….…37 Chapter 3: Research methodology 3.1. Research Objectives…………………………………………………………… 39 3.2. Research Method………………………………………………………………… 39 3.3. Sample Selection………………………………………………………………… 40 3.4. Hypothesis Statement………………………………………………………………41 8 Chapter 4: Result analysis 4.1. Collection of Questionnaires…………………………………………….…… 43 4.2. Description of Result………………………………………………….……… 43 4.2.1. Demographic data…………………………………………………….…….43 4.2.2. Finding and discussions…………………………………………………….44 4.2.2.1. Analysis of responds related to existence of fraud……………….44 4.2.2.2. Analysis of responses related to auditors’ responsibility in detecting……………………………… 46 4.2.2.3. Analysis of responses related to the audit procedures applied to detecting fraud……………………………………… 49 4.3. Result Analysis…………………………………………………………………52 Chapter 5: Conclusion and Recommendation 5.1. Conclusion………………………………………………………………………56 5.2. Recommendation……………………………………………………………….56 5.3. Limitation of my study…………………………………………………………57 5.4. Suggestion for future research………………………………………………… 57 Reference……………………………………………………………………………… 59 APPENDIX………………………………………………………………….61 9 CHAPTER 1: INTRODUCTION 1.1. Research Background 1.2. Problem Statement 1.3. Objectives and Sphere of Research 1.3.1. Objectives of Research 1.3.2. Sphere of Research 1.4. Research Methods 1.5. Structure of Research 10 CHAPTER 1 1. INTRODUCTION 1.1. Research Background This study investigates the role of auditors in the detecting, preventing and reporting of fraud. I collected data from 100 respondents in Vietnam. But only 70 respondents were received. From this research, many people thinks that fraudulent activities is very affect to entity and auditors play an important role in detection and prevention fraud. In this study, I will further analysis about auditors’ duties in fraud: prevention and detection of fraud. 1.2. Problem Statement All organizations can be a risk of fraud. As we know, large frauds will lead to the collapse of the entire organizations, causing major losses to investors, an important legal cost, affecting directly to key individuals, and loss of confidence in capital markets. Publicized fraudulent behavior by key executives has negatively impacted the reputations, brands, and images of many organizations in the worldwide. The definition of “fraud prevention” and “fraud detection” are related to each other; however it is not the same concepts. Preventing fraud includes policy, procedure, training and communication to prevent fraud happening, while the findings focusing on the activity and technique in order to quickly recognize fraudulent whether fraud has happened or is happening. [...]... records, and information throughout the organization Best practices of internal auditing suggest the following activities for internal auditors in order to enhance their active role in the financial reporting process and thus, their role in prevention and detection financial statement fraud: 27  Schedule meetings between the chief internal auditor and the audit committee regarding the financial reporting... reporting in particular, as the main purpose of financial audit In recent years, in the Statement of Auditing Standards (SAS) No 99 entitled Consideration of Fraud in a Financial Statement Audit, it was directly referring to the professional role and profession of accounting estimates of the external auditors in detecting fraud in financial statements SAS No.99 request independent auditors to obtain information... that internal auditors take an active role in prevention and detection financial statement fraud Statement on Internal Auditing Standards (SIAS) No 3 requires internal auditors to take a positive role in prevention and detection financial statement fraud by: o Defining quality of red flags to signal the possibility of fraud o Investigate the symptoms and evolution of fraud o Reporting their findings... Conclusion and Recommendation 13 CHAPTER 2 LISTERATURE REVIEW 2.1 Definition of fraud 2.1.1 Distinguish between fraud and errors 2.1.2 How fraud occurred 2.2 Auditor’s responsibilities in fraud detection and prevention 2.2.1 Detecting fraud: What are the roles of external and internal auditors? 2.2.1.1 External auditors’ role 2.2.1.2 Internal auditor’s role 2.2.2 Role of auditor in preventing fraud 2.3 The. .. statement fraud Nevertheless, there is a widening expectation gap between what auditors should be 22 doing and what auditors are willing to accept and are capable of doing to discover fraud according to their standards of auditing and the fees collected for their services However, the auditors are to focus on fraud in the financial statement The external auditors had discovered fraud, fraudulent financial... on the financial statements The Standards concentrated on financial statement and programs to appropriate property Special thing is that the standard does not provide a 16 definition of fraud Instead the auditors are guided by the standard definition of errors in financial statements An example of a professional standard applicable to fraud is the Institute of Internal Auditors Standard 1210.A2 The Institute... cannot prevent fraud Nevertheless, the auditors can be instrumental in helping to assemble the resources of the different departments in a corporation and work with directors, management, employees, and other people to prevent fraud But in this my proposal, I only concentrate on the role of internal and external in preventing fraud Firstly, internal Auditors plays important role in company Internal audits... It includes the use of deception to obtain an unfair or illegal advantage According to ISA 240 (Redrafted), there are two types of fraud relating to the auditors, frauds was misstatements arising from fraud in financial reporting, and misstatements arising from the appropriate property Differences from the fraud, “error” refers to an unintentional misstatement in financial statements that including the. .. detecting financial statement fraud  Full assessment and effective a structure of the internal control, particularly in the financial statement 28  Assessing the quality of the financial reporting process, containing a review of both annual and quarterly financial statements filed with the Securities and Exchange Commission (SEC) and other management agencies  Join with the audit committee and external... (director 11 of the company) is primarily responsible for the fairness of the company’s financial statements 1.3 Objectives and Sphere of Research 1.3.1 Objectives of research  To sum up the definitions fraud, how fraud occurs  Distinguish between Fraud and Error  Determine the role of external and internal auditors in detection and prevention fraud  How the auditors can prevent and detecting fraud  How . not the same concepts. Preventing fraud includes policy, procedure, training and communication to prevent fraud happening, while the findings focusing. up the definitions fraud, how fraud occurs.  Distinguish between Fraud and Error  Determine the role of external and internal auditors in detection and