About Auditing

1
About Auditing Fraud Examination

• Accounting 537
• M. Popowits

2
What is Philosophy?

• Philosophy is concerned with the systematic
  organization of knowledge
• Philosophy gets back to first principles, or
  the concepts that underlie thoughts and action
• The philosophy of a subject is the concepts
  underlying a given branch of learning.
• Sris definition the philosophy of a discipline
  is the pot of unresolved intellectual questions
  of that field .

3
Insights from Sri Ram and Mautz Sharaf

• There is a lot of philosophy underlying auditing
  FE.
• Auditing is not accounting.
• Auditing and FE exist in a matrix of
  philosophical and behavioral influences.
• There are many logical methods used in auditing
  and FE

4
Why do we do what we do as professionals?
APPLICATIONS
CONCEPTS
PHILOSOPHY
5
TWO BASIC PHILOSOPHICAL INQUIRIES
how do you know?

• What is true? Questions of FACT
• What should be? - Questions of VALUE

6
DEFINITIONS

• Accounting the process of identifying,
  measuring, and communicating economic information
  to permit informed judgments and decisions by
  users of the information. ASOBAT, 1966
• Auditing is a systematic process of
  objectively obtaining and evaluating evidence
  regarding assertions about economic actions and
  events to ascertain the degree of correspondence
  between those assertions and established criteria
  and communicating the results to interested
  users. ASOBAC, 1973

7
Auditing is NOT Accounting!

• Auditing emphasizes proof, and hence, has its
  roots, not in accounting, which it reviews, but
  in logic, on which it leans heavily for ideas and
  methods. (Mautz Sharaf, 1961)
• Assurance services.

8
EPISTEMOLOGY
ETHICS
PHILOSOPHICAL CONCEPTS
AUDITING FRAUD EXAMINATION
PSYCHOLOGY
LAW
ECONOMICS
9
Some influences

• Ethics of reporting fraud
• Psychological factors in auditor judgment
• Background, personality, rationalization
• Economic Legal Factors
• Costs / benefits of regulation
• Time limitations on audits
• Liability
• Civil Criminal law

10
EPISTEMOLOGY
ETHICS
PHILOSOPHICAL CONCEPTS
AUDITING FRAUD EXAMINATION
PSYCHOLOGY
LAW
ECONOMICS
11
EPISTEMOLOGY
ETHICS
PHILOSOPHICAL CONCEPTS
AUDITING FRAUD EXAMINATION
PSYCHOLOGY
LAW
ECONOMICS
12
Epistemology
EPISTEMOLOGY

• Use of Logic, Ways of knowing
• Logical procedure of auditing
• Hired to give an opinion about the fairness of
  F/S
• Assertions-based
• Existence or occurrence
• Completeness
• Rights and obligations
• Valuation or allocation
• Auditor tests the assertions by gathering and
  evaluating evidence, using various ways of
  knowing, and making decisions about truth of each
  assertion, and ultimately the fairness of the F/S

13
Why Auditing?

• Viability of Capital Markets
• Investors need reliable information to determine
  RISK RETURN of investments.
• Auditors attest to the fairness of F/S.
• An unqualified opinion provides reasonable
  assurance that financial statements are free from
  material misstatement.

14
Auditing Approach

• Assertions-based
• The auditor tests F/S assertions

Every number on the financial statements
represents a set of claims being made
by management known as
Assertions
15
Financial Statement Assertions
Sales 1,500,000.00

• This statement asserts
• All sales are properly included,you have left
  none out
• 2. All sales actually occurred, numberrepresents
  actual sales made
• 3. Sales are properly valued, net ofreturns,
  allowances, discounts
• 4. You have proper claim to revenuegenerated,
  sales belong to you

16
Financial Statement Assertions
Sales 1,500,000.00
This statement asserts 1. All sales are
properly included, you have left none
out 2. All sales actually occurred, number
represents actual sales made 3. Sales are
properly valued, net of returns,
allowances, discounts 4. You have proper claim to
revenue generated, sales belong to you

COMPLETENESS
17
Financial Statement Assertions
Sales 1,500,000.00
This statement asserts 1. All sales are
properly included, you have left none
out 2. All sales actually occurred, number
represents actual sales made 3. Sales are
properly valued, net of returns,
allowances, discounts 4. You have proper claim to
revenue generated, sales belong to you

COMPLETENESS
EXISTENCE
18
Financial Statement Assertions
Sales 1,500,000.00
This statement asserts 1. All sales are
properly included, you have left none
out 2. All sales actually occurred, number
represents actual sales made 3. Sales are
properly valued, net of returns,
allowances, discounts 4. You have proper claim to
revenue generated, sales belong to you

COMPLETENESS
EXISTENCE
VALUATION
19
Financial Statement Assertions
Sales 1,500,000.00
This statement asserts 1. All sales are
properly included, you have left none
out 2. All sales actually occurred, number
represents actual sales made 3. Sales are
properly valued, net of returns,
allowances, discounts 4. You have proper claim to
revenue generated, sales belong to you

COMPLETENESS
EXISTENCE
VALUATION
RIGHTS/ OBLIGATIONS
20
The Logic of Auditing

• Auditors must give an opinion about the fairness
  of the financial statements.
• They do this chiefly by validating the F/S
  assertions.
• To do this they use their knowledge of
  transaction cycles, risk analysis, and the audit
  trail to gather evidence for validation.

21
EvidenceSidebar on Information Evidence by Sri
Ramamoorti

• What is the relationship between information and
  evidence?

Information
Evidence
22
EvidenceSidebar on Information Evidence by Sri
Ramamoorti

• What makes information evidence?
• Relevant pertains to the question
• Sufficient quantity
• Reliable

23
The CFEs Evidence Square
Testimonial
Documentary
Gathered from Individuals, Includes Interviewing,
Interrogation Honesty Tests
Gathered from Papers, Computers Written
Printed Sources
Personal Observation
Fingerprints, Weapons, Stolen Property Often
Involves Forensic Analysis
Collected by the Investigator, includes
Invigilation, Surveillance and Covert Operations
Physical
24
Logical Methods (MS pp. 110-117)

• Overall our attitude is one of Professional
  Skepticism
• Within that we apply logical methods
• Authoritarianism Mysticism
• Rationalism Empiricism
• Pragmatism

25
Logical Methods (MS pp. 110-117)

• Authoritarianism what another said
• Mysticism intuition, instinct, unexplained
  understanding of relationships
• Rationalism reasoning from universal concepts
  to a particular case (deduction)

26
Deduction

• Premise All men are mortal.
• Premise Socrates is a man.
• Inference (Conclusion) Therefore Socrates is
  mortal.
• The picture is above the desk.
• The desk is above the floor.
• Therefore the picture is above the floor.
• All birds can fly.
• A cardinal is a bird.
• Therefore a cardinal can fly.

27
Deduction?

• Every criminal opposes the government.
• Everyone in the opposition party opposes the
  government.
• Therefore everyone in the opposition party is a
  criminal.
• LOGICAL FALLACY!
• FALLACY OF THE UNDISTRIBUTED MIDDLE

28
Deduction in Auditing?

• Premise Strong internal control requires 3
  people be involved in every transaction
  reporting, execution, authorization
• Premise Here is a transaction that does not have
  3 people involved
• Conclusion Internal control over this
  transaction is weak

29
Logical Methods (continued) (MS pp. 110-117)

• Empiricism perceptual experience
• Pragmatism truth by observing consequences,
  practicality, what works

30
Auditing Methods (MS pp. 118 122)

• Authoritarianism
• Testimony of people (confirmations
  representations)
• Testimony of documents (outside, inside)
• Mysticism
• Scanning of records, reports
• Evaluation of peoples statements
• Rationalism
• Recalculations, testing of internal controls,
  using the audit trail
• Empiricism
• Physical examination, counting
• Pragmatism
• Subsequent actions of company, officers,
  employees, customers, vendors

31
STRENGTH OF EVIDENCE

• Incontrovertible
• Conclusive
• Persuasive
• Corroborative
• Reasonable/Moderate
• Minimal
• Corroboration - by experienced auditors allows
  evidentiary matter to be evaluated holistically,
  and in the aggregate, not as separate, unrelated
  items
• Quality copies vs. originals, etc.
• Statistics used to measure adequacy of evidence

32

• Auditor tests the assertions by gathering and
  evaluating evidence, using various ways of
  knowing, and making decisions about truth of each
  assertion, and ultimately the fairness of the F/S

33
DECISION MATRIX
Type II Error (ß)
Type I Error (a)
34
Bridging to Fraud Examination.
35
EPISTEMOLOGY
ETHICS
PHILOSOPHICAL CONCEPTS
AUDITING FRAUD EXAMINATION
PSYCHOLOGY
LAW
ECONOMICS
36
(No Transcript)
37
(No Transcript)
38
(No Transcript)
39
(No Transcript)
40
(No Transcript)
41
(No Transcript)
42
(No Transcript)
43
(No Transcript)
44
End About Auditing

• Fraud Examination
• Actg 537