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New Audit Requirements Make Audits Longer and More Expensive

October 14, 2011

Audits are requiring more time and are costing more money.  I don’t like this any more than you do.  In this blog, I will take one of the newer audit requirements and explain how this is adding time and money to your audit.

Audits are requiring more time and are costing more money. I don’t like this any more than you do. In this blog, I will take one of the newer audit requirements and explain how this is adding time and money to your audit.

An audit is performed in accordance with Generally Accepted Auditing Standards (GAAS). One might say that these standards evolve with business practices, but the reality is that auditing standards only seem to grow and require more and more work.

In 2003 auditing standard #99 became effective. This is the audit standard that requires auditors to consider the possibility of fraud when performing a financial statement audit. I am sure you have heard of all of the scandals, like Enron, WorldCom and Bernie Madoff involving fraud. As a result, auditors have increased their professional responsibility to do their best to detect fraud in every organization that is audited. I encourage you to read the standard yourself.

What does just this one standard mean to the audit process?

At a minimum, auditors are required to interview and ask questions. Standard #99 requires the auditor to interview:

  • Management
  • The audit committee
  • The internal audit director
  • Front line staff

Each fraud interview can consume an hour or more of time - 15 minutes to prepare, 20 minutes to conduct the interview and 25 minutes to document the process. And this assumes the client doesn’t have anything juicy to say. I will paraphrase the standard as I give you a taste for the nature of the questions the auditor will discuss during these fraud interviews:

  • Do you have any knowledge of fraud or suspected fraud affecting the organization?
  • Are you aware of allegations of fraud?
  • What does the organization do to prevent fraud?
  • Are employees made aware of their responsibilities regarding ethical behavior?
  • If someone wanted to commit fraud here, how would they do it?

Of course, you must realize that these questions, required by GAAS, are not guaranteed to uncover fraud. But the questions do highlight areas that the auditor may want to focus on to provide some degree of assurance that fraud didn’t and isn’t happening. So, unfortunately, in addition to the number of hours just to conduct the fraud interviews, the diligent auditor must then expand audit testing to further look into some items before concluding that all is OK.

In the 7 or so years since this standard became a part of the audit process, I am not sure how many business frauds have been uncovered. That is not to say that these audit procedures are ineffective – any more than an annual physical examination with no problems found is ineffective. But I think we all should ask if the proper response to problems such as business fraud, is the imposition of hours of additional auditing procedures.

Not many of us in New England own a gun for protection against wild animals. We realize that with proper precautions, the potential for interaction with a wild animal can be reduced significantly. We also realize that the addition of a gun does not guarantee success in a wild animal encounter. Of course we made this type of decision singularly. Auditing standards are created by committee.

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