Auditing standards require external auditors to consider potential fraud risks. These auditors watch out for conditions that provide the opportunity to commit fraud. Unfortunately, conditions during the COVID-19 pandemic may have increased your company’s fraud risks. For example, more employees may be working remotely than ever before. Some workers may be experiencing personal financial distress — due to reduced hours, decreased buying power, or the loss of a spouse’s income — that could cause them to engage in dishonest behaviors.

Financial statement auditors must maintain professional skepticism regarding the possibility that a material misstatement due to fraud may be present throughout the audit process. Specifically, fraud risks, requires auditors to consider potential fraud risks before and during the information-gathering process. Business owners and managers may find it helpful to understand how this process works — even if their financial statements aren’t audited.

Doubling down on fraud risks

During planning procedures, auditors must conduct brainstorming sessions about fraud risks. In a financial reporting context, auditors are primarily concerned with two types of fraud:

1. Asset misappropriation. Employees may steal tangible assets, such as cash or inventory, for personal use. The risk of theft may be heightened if internal controls have been relaxed during the pandemic. For example, some companies have waived the requirement for two signatures on checks. Meanwhile, others have reduced oversight during physical inventory counts.

2. Financial misstatement. Intentional misstatements may be used to deceive people who rely on your company’s financial statements. This includes omissions of amounts or disclosures in financial statements. For example, managers who are unable to meet their financial goals may be tempted to book fictitious revenue to preserve their year-end bonuses. Or a CFO may alter fair value estimates to avoid reporting impairment of goodwill and other intangibles and triggering a loan covenant violation.

Identifying risk factors

Auditors must obtain an understanding of the entity and its environment, including internal controls. They must be able to identify the risks of material misstatement due to fraud. If given the opportunity, some companies will improperly recognize revenue and management will attempt to override internal controls.

Examples of fraud risk factors that auditors consider include:

• Large amounts of cash or other valuable inventory items on hand, without adequate security measures in place
• Employees with conflicts of interest, such as relationships with other employees and financial interests in vendors or customers
• Unrealistic goals and performance-based compensation that tempt workers to artificially boost revenue and profits
• Weak internal controls

Auditors also watch for questionable journal entries that dishonest employees could use to hide their impropriety. These entries might, for example, be made to intracompany accounts, on the last day of the accounting period or with limited descriptions. Once fraud risks have been assessed, audit procedures must be planned and performed. The goal is to obtain reasonable assurance that the financial statements are free from misstatement.

Following up

Auditors aren’t required to investigate fraud, but they are required to communicate fraud risk findings to the appropriate level of management. Management can then take actions to prevent fraud in their organizations. An auditor may withdraw from the engagement if an audit plan seems unsuccessful in adequately addressing fraud risks.

Contact our RRBB accountants and advisors to discuss your concerns about heightened fraud risks during the pandemic. We can also discuss ways we can adapt our audit procedures for emerging or increased fraud risk factors.

© 2021

DISCLAIMER: “RRBB” is the brand name under which Rosenberg Rich Baker Berman P.A. and RRBB Advisors, LLC and its subsidiary entities, including CFO Financial Partners LLC, provide professional services. Rosenberg Rich Baker Berman P.A. and RRBB Advisors, LLC (and its subsidiary entities) practice as an alternative practice structure in accordance with the AICPA Code of Professional Conduct and applicable law, regulations and professional standards. Rosenberg Rich Baker Berman P.A. is a licensed independent CPA firm that provides attest services to its clients, and RRBB Advisors, LLC and its subsidiary entities provide tax and business consulting services to their clients. RRBB Advisors, LLC and its subsidiary entities are not licensed CPA firms.