Tài liệu Fraud and responsibilities of auditor in detecting and preventing of fraud

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DECLARATION OF ORGINALTY AND WORD ACCOUNT I hereby declare that the graduation project is based on my original work except quotations and citations, which has been duly acknowledged. I also declare that it has not been previously or concurrently submitted for any other course/degree at Help University or other institutions. The word count is 10,052 words. NGUYEN THI HIEN E0700282 i ACKNOWLEDGEMENT First of all, I would like to express my sincere appreciation to my supervisor, Dr. Nguyen Hong Quan who has guided me throughout this study. His constant guidance, insightful suggestions, and constructive ideas are the essential inputs and encouragement for me in order to complete this study. The next, I would like to acknowledge to all manager, auditors and bankers who allowed and assisted me to collect all of necessary information for me to get this study done. Without their contribution, I could not be able to gather much information for my research. Lastly, I would also like to extend my heartfelt gratitude to my friends for their continuous support, encouragement and contribution, which have been crucial during the presentation of this report. My study cannot be finished without your supports. THANKS FOR EVERYONE ii FRAUD AND RESPONSIBILITIES OF AUDITOR IN DETECTING AND PREVENTING OF FRAUD BY NGUYEN THI HIEN OCTOBER 2011 Supervisor: NGUYEN HONG QUAN ABSTRACT The purpose of this paper is to discuss about the fraud and the responsibilities of auditor in detecting and preventing of fraud. Fraud can be considered as most concerning problem of the business. Because of this have more effect to all most of companies in the world. However, the companies can make more motivations from fraudulent activities, then, this trend is being likely continued in the futures. There are many types of fraud such as accounting fraud, investment frauds, financial fraud, etc. Fraud is one of the big issues to make more damage in the company. Therefore, the responsibilities of auditor play important in detecting and preventing fraud. In this study, I will discuss about this, and some issues that related to audit procedure that auditor applied in working process. iii TABLE OF CONTENT DECLARATION OF ORGINALTY AND WORD ACCOUNT i ACKNOWLEDGEMENT ii ABSTRACT iii TABLE OF CONTENT iv LIST OF TABLE vii LIST OF ABBREVIATIONS viii CHAPTER 1: INTRODUCTION 1 1.1 Background of study 1 1.2 Objective of research 2 1.3 Problem of Statement 3 1.4 Limitation of research 5 1.5 Structure of research 5 CHAPTER 2: LITERATURE REVIEW 7 2.1 Fraud 7 2.1.1 Definition of fraud 7 2.1.2 Differences between fraud and error 10 2.2 Motivations of Fraud behavior 12 2.3 Responsibilities in fraud detection and prevention 13 2.3.1 Responsibilities of internal auditor 13 2.3.2 Responsibilities of external auditor 14 2.5 Audit procedure 17 iv CHAPTER 3: RESEARCH METHODOLOGY 19 3.1 Research problem 19 3.1.1 Aim of the research 19 3.1.2 Objective of the research 19 3.2 Data collection 20 3.2.1 Primary data 20 3.2.2 Secondary data 21 3.3 Research Instrument 22 3.3.1 Survey 22 3.3.2 Questionnaire 23 3.3.2.1 Questionnaire about the extent of fraud 25 3.3.2.2 Questionnaire about the responsibilities of auditor 25 3.3.2.3 Questionnaire about the audit procedure that auditor applied in detecting and preventing of fraud 26 3.4 Sampling 26 3.5 Limitation of research 26 CHAPTER 4: FINDING AND ANALYSIS 27 4.1 Analysis of responses related to extent of fraud 28 4.1.1 Existence and extent of fraud 28 4.1.2 Differences between fraud and error 30 4.2 Analysis of responses related to the role and responsibility of auditors for fraud detection and prevention. 31 4.3 Analysis of responses related to audit procedure 34 CHAPTER 5: CONCLUSION 38 5.1 Awareness of respondents about the extent of fraud 38 v 5.2 Awareness about the responsibilities of auditor 39 5.3 Awareness of respondents related to audit procedures 40 5.4 Recommendation 41 5.5 Scope of future research 42 REFERENCES 44 ANPENDIX A: QUESTIONNAIRES 46 vi LIST OF TABLE TABLE 1: Responses by groups of respondents TABLE 2: Perceptions of extent of fraud TABLE 3: Responses related to the different between fraud and error TABLE 4: Responsibility of auditors for fraud detection and prevention TABLE 5: Audit procedure applied for fraud detection vii LIST OF ABBREVIATIONS ISA: International Standard of Auditing SAS: Statement on Auditing Standard viii CHAPTER 1 INTRODUCTION 1.1 Background of study In recent year, fraud crime has more increased in over the world, and professionals believe that fraud is this trend will be continuing in the future. Evidence is, there are many cases about fraud that have occurred throughout over the world such as Enron and WorldCom. When scandals happen, companies have tried to keep these scandals quite, sometimes outsiders did not know. Many business frauds are happening in everyday, but it does not noticed. Unfortunately, scandals are the tip of the iceberg and represent visible failures. These companies could really go down for such setbacks. In addition, with the development of technology, especially, it is expanding of computers into businesses. These can make organizations more vulnerable to the fraud. In late year 2001, Enron and WorldCom events declared bankrupt with debts of huge scandals involved in the operation of Authur Andersen auditing firm. This event has forced experts paid more attention to audit risk and continually improve the quality of audit activities. Therefore, the auditor plays important role in the work of detecting fraud. The need for auditors may be seen as a response to the agency problem and the audit functions as a mechanism to attest to the accountability and stewardship of company management to reduce the possibility of innocent mistakes and deliberate misstatements such as fraud and management manipulation (Chandler, Edwards and Anderson, 1993). The role of auditor plays importance in detecting and 1 preventing fraud, although it is difficult to uncover the conclusive fraud. In order to combat the fraud in businesses, management of business as well as the auditors, must have to do the right job and their obligations. Therefore, in this study, the researcher will discuss more detailed information relating to fraud and the role of auditor in preventing and detecting its. 1.2 Objective of research This study is to help the reader to understand some issues that related to fraud and the responsibilities of auditor in preventing and detecting fraud. Accordingly, this study will provide some objectives below. The first objective, the researcher wants to provide all necessary information relating to the fraud. In order to help readers understand about the topic, fraud will be dividing in to three parts. The first past will support for the overview of fraud. The second past will provide some detailed information relating to difference between the fraud and error. The third part will answer the question why some companies are motivated by fraudulent. The next objective is to clarify the importance of auditor and the responsibilities of auditor in preventing and detecting fraud. Following this, the objective of this study is to obtain from the view of some respondents about mistake actions in fraud. We can warn businesses about fraud and the potential threats of it. In addition, the readers can understand about the audit procedure that auditor applies in searching and preventing of fraud. 2 1.3 Problem of Statement As mentioned above, this study concentrates on discussion about the concept of fraud. First, this study provides the definition and conceptualization of it in general. Some concepts of fraud are discussed to help readers get overview of fraud. There are many definitions about the fraud. Fraud can define from the legal point of view. For example, in criminal law, fraud is defined as cheat, misguidance, and delusion for profit purposes by inducing damage (Mr. Alexandru Boroi, Dictionary of Criminal Law). In Civil law, Mr. Mircea N. Costin also defines fraud as an intentional violation by the parties of the mandatory provisions of the legislation in force, often by using perfidious means, at the conclusion or execution of a legal act (Dictionary of Civil Law). Put simply, fraud is way to trick you out of your money. Following Aderibigbe and Dada (2007), fraud is a deliberate deceit planned and executed with the intent to deprive another person of his property or rights directly or indirectly, regardless of whether the perpetrator benefits from his/her actions. Fraud is difference with error. However, some people are confused with two definitions. In this study, we will discuss about the differences between the fraud and error. In addition, the study also will give reasons why companies are motivated by fraud above. Various studies said about the issue of motivation of fraud. For example, in the Enron case, the accountants of this company have wrong doings in writing false statement about the losses and profit of Enron. According to James Bodurtha, Jr., he shows that from 1997 until its demise, “the primary motivations for Enron's accounting and financial transactions seem to have been to keep reported net 3 income and reported cash flow up, gross asset value inflated, and liability off the books”. After accounting scandal, Enron has lost the trust of company, Fraud can have more effect for many companies. Therefore, in this study, we will discuss about the responsibilities of auditor. As we know that, the auditors play important role in detecting and preventing for fraud. Under the SAS No.53, the auditor's responsibility is to detect and report errors and irregularities. This standard issued by the Accounting Standards Board (1988). Auditors have greater responsibility for detection of accounting fraud than was currently being met. In addition, "The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. Because of the nature of audit evidence and the characteristics of fraud, the auditor is able to obtain reasonable, but not absolute, assurance that material misstatements are detected. The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by error or fraud, that are not material to the financial statements are detected."(SAS No. 1, Codification of Auditing Standards and Procedures). This standard shows that auditors can base the action of plan and perform an audit to obtain reasonable assurance about whether financial statements are free of material misstatement; the auditors can prevent the fraud and reduce the risk for company. In this study, we will discuss more about the responsibilities of auditor in preventing and detecting for fraud by answering these issues above. 4 1.4 Limitation of research Fraud is one of broad definition. Many topics related to fraud such as accounting fraud, financial fraud, and so on. Thus, this is limitation of study because it is hard for researcher to cover all topics here. Moreover, time is one of the limitations of this study. The researcher has not enough time to conduct all information of all aspects that related this topic. Therefore, in this study, the researcher is only focus on some aspects and all necessary information to help reader understanding effectively. 1.5 Structure of research This study is divided into five following chapters. These chapters are introduction, literature review, research methodology, case study analysis, and conclusion and recommendation. This study is arranged as above as to give the reader to understand this paper on the logical way. The title of chapter 1 is "Introduction". This chapter will provide the general picture of the topic that the researcher want to discuss in this study The title of chapter 2 is “Literature review”. This chapter will bring all necessary information that related to the fraud such as various concepts of fraud as well as some differences between fraud and error. The next, we analysis different motivations for fraud use. The project continues with the responsibilities of auditors in preventing and detecting of its. 5 The title of chapter 3 is “Research methodology”. This chapter will analyze some data collection methods that will use in this study such as primary data, secondary data, questionnaires or survey, so on. The title of chapter 4 is “Finding and Analysis”. This chapter will analyze all the collected information from useful data sources such as secondary data and survey questions with using some audit standard. The title of chapter 5 is “Conclusion” that will summarize and evaluate all the results that researcher discussed above and after then various recommendations for the issue of this study. 6 CHAPTER 2 LITERATURE REVIEW Chapter Literature Review was developed to provide framework relating to fraud and the responsibility of auditor in preventing and detecting fraud. The objective of chapter 2 is to provide some of various studies and theories around this definition of fraud and responsibilities of auditor. Then, this also helps readers to have overview of this topic. 2.1 Fraud In this section, we will discuss some of aspects that related to the fraud. In order to help the readers understand the fraud by effective way, this section will be divided into two parts. The purpose of doing that is to provide some of the definitions for the fraud that many people or website said. In addition, the readers can have distinguished between fraud and error. 2.1.1 Definition of fraud Fraud is a trend that has increased over the recent year in the world. There are many companies that occurred scandal of fraud suffered several damages, and even related to the law. For example, Bernard Ebbers the former chairman of WorldCom was jailed for 25 years for orchestrating a $US11 billion financial statement fraud (Belson, 2005). Thus, fraud is important issue for all business. In this section, the literature review shows that fraud is broad definition. There are many ways to define 7 the fraud and abuse by many studies prior. Now, the researcher would like to show these definitions below. Fraud, According to Brink and Witt (1982), is an ever present threat to the effective utilization of resources and it will always be an important concern of management. Based on many impacts of fraud in the recent time, we recognize that fraud is potential threats. This is a threat for using of resources, so management must consider careful to avoid the fraud in the company. In addition, Following the Webster's New Universal Unabridged Dictionary, fraud is "intentional deception to cause a person to give up property or some lawful right". While according to Accounting and auditing definition, fraud is an intentional act that results in the material misstatement in financial statement that is the subject of an audit. The fourth definition comes from the Association of Fraud Examiners. They further define occupational fraud and abuse as a form of abuse occupational to make personal interests through deliberate misuse and misapplication of assets or resources of the company (Report to the Nation on Occupational Fraud and Abuse, 1999). Beside these definitions above, Federal Bureau of Investigation also describes fraud as the deceptive practices of money or property of others in ways such as stealing of assets, larcenies by bailee and bad checks, except forgeries and counterfeiting (FBI 1984:342). After understand some definitions of fraud above, we realize that the common thing between these definitions of fraud is an intentional deception to the satisfaction of an individual or group. In addition, Adeduro, 1998 and, Bostley and Drover 1972 also define Fraud. Fraud can be seen as act of intentional misrepresentation or concealing activities in contrast 8 to the truth, making influence and causing of financial losses for an individual or an organization. This includes theft, embezzlement or any attempt to steal, illegally obtain, and misuse or damage the property of the company. This definition also has similar content with the definition of Weirich and Reinstein, they define fraud as “intentional deception, cheating and stealing” (2000 cited in Allyne & Howard 2005). Moreover, ISA 240 „The Auditor‟s Responsibilities to Consider Fraud in an Audit of Financial Statement (Revised)‟ defines fraud by another way. This standard said that governance of entity, management, employees or the third parties have intentional actions by using deceptions to obtain personal interest or illegal advantages. These deception acts or dishonest behaviors such as omissions and making of false statement by orally or in writing to obtain benefits or have more advantages from eluding of liability(Anti-fraud policy in Murdoch University (2001). While Aderibigbe and Dada (2007) also refers to fraud as the intentional acts that are planned and implemented with the purpose of depriving another person's property by the both directly or indirectly ways, regardless of benefit or not from these action. In the world, there are some studies about classical fraud. The first study is to mention is the work of Donald R. Cressey (1919-1987). Donald R. Cressey is a crime researcher at Indiana University (USA) at 40 years of the 20th century. Cressy has chosen to research the issue of corruption, embezzlement, as the subject for his doctoral thesis. He gives the model: Triangle fraud to present the factors leading to the fraud that has now become one of the orthodox models used in many different careers in research fraud, including the audit profession. Fraud triangle consists of 9 three factors that are opportunities attitude and personality, and pressure. The next studies, D. W. Steve Albrecht, he is a criminologist working at Brigham Young University (USA). He along with two colleagues Keith Howe and Marshall Rommey has analyzed 212 cases of fraud in the 1980s under the sponsorship of the Association of Research founder of internal audit. He has published works: "Burial of fraud, the prospect of internal audit." The purpose of this study is to identify important signs of fraud to the manager can prevent and found them. Fraud can occur in many sectors, and it can be classified many type such as accounting fraud, investment frauds, embezzlement, or miscellaneous fraud. Therefore, all companies should consider carefully. The next, we will discuss some studies prior about distinguish of fraud and error. 2.1.2 Differences between fraud and error Nowadays, the fraud and abuse is one of big problem for all businesses. However, most of them still confuse between fraud and honest mistake or error. Before understanding the differences between them, the researcher will help the reader to know about each of two concepts. Firstly, Fraud, according to Mr. Mircea N. Costin, in his “Dictionary of Civil Law”, they define fraud as an intentional behaviors by an individual or an organization shall be mandatory by law, often by using treacherous means, when conclusion and implementation the act of law. Fraud involves like that:  Amendment documents, accounting records falsified financial statements;  inadequate capital assets; 10  omission of some transactions in records or covering or deliberate omission of information or documents of economic and falsifying financial statements  recording of transactions without substance;  Intentional misapplication of standards, principles, methods and regulations on accounting, financial policies In contrast to fraud, error is unintentional actions and to an involuntary misstatement that happened in financial statements, including the omission in writing or disclosure financial statement, error could occur when:  collecting and processing data on financial statement  An incorrect accounting estimate occurred due to overlooking or mistake of facts;  In applying accounting policies related to data assessment, recognition, classification or disclosure. Everyone can make mistakes, including scientists. It is thing that no doubt. You can easily misspell a word and can move two digits in a number of records, or can easily press the wrong on your computer. However, do have different between fraud and honest mistake or error? The different between fraud and error is action that seems to be matter of intention. Following ISA 240 (redrafted), it said that „The distinguishing factor between fraud and error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional.‟ ISA 240 (Redrafted), paragraph 2. That mean Fraud is underlying action that has results 11 intentional, while error is done by accidents. A website also provided introduction for student about this distinction. It is "On Being a Scientist". "Of all the violations of the ethos of science, fraud is the gravest. As with error, fraud breaks the vital link between human understanding and the empirical world, a link that is science's greatest strength. But fraud goes beyond error to erode the foundation of trust on which science is built." (Committee on the Conduct of Science, 1989) By way of contrast to fraud, we can see the different between fraud and error. However, in this study, the researcher is to focus on fraud than error because fraud responsibility is more controversial than error. 2.2 Motivations of Fraud behavior This study will give reasons why companies use fraud in company above. Nowadays, there are some research studies, which said about some of motivation lead to the fraud behavior. Some motivations such as the existence of tax levies based on income, confidence by shareholders and employees in management that is able to report stable earning and expectations relating to the increase or decrease in anticipated income (Hepworth, 1953). Niskanen & Keloharju (2000) and Herrmann & Inoue (1996) are also showed that tax is mentioned as a significant motivator. Some companies can have fraud because of avoiding the tax. They will change their income to decrease the tax. Thus, existence of tax is one of the motivations that we think first when a companies are to fraud. 12
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