Archives for December 2014

The Fault in the Audit

In the last few years, there has been a lot of focus on audits and transparency in businesses. The pressure on auditors to present a complete audit is increasing with each new regulation that comes out. Auditors have become the “public watchdogs” for companies because sometimes individuals succumb to the pressures and opportunities to commit financial statement fraud. The pressure on them to find fraud in the financial statements of a company, but not all audits are designed to find fraud.

There are two types of financial statement audits performed—regular financial statement audits and fraud audits. The term “financial statement audits” refers to and audit that looks at all the financial statements in their entirety to determine if the statements are presented fairly. Fraud audits are performed in a completely different manner. Fraud audits look in greater depth at specific elements that might be misstated in a financial statement. A fraud audit is time consuming and very expensive to conduct, but it is the only way to detect material fraud in financial statements.

This is the main reason why regular audits cannot detect fraud. These audits do not go in depth enough to examine every transaction or account, nor is it feasible that they are able to conduct an audit on that level every time. Another reason a regular audit over financial statements may not detect fraud is because it is being hidden by outsiders or people are reluctant to disclose what they know.

While it is important to conduct audits that look at financial statements, it is also important for the auditor to be aware of the different ways the fraud can be hidden from them. The gap in in expectations can lead to costly litigation and realistically auditors should not be expected to detect financial fraud through an audit of financial statements if they are preforming the audits to the quality required of all auditors.

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Questions to Ask to Keep Top Clients

Business is a competitive field full of land mines and glory, but how do you achieve that glory with your clients? There are ways to keep client satisfied with the services that your company offers. One way is by asking questions. There are three questions businesses should ask clients on a regular basis to ensure that your business is meeting their needs.

Companies have brainstorm sessions to throw out ideas that will help provide more quality services for their clients. In the brainstorm session, it is important to answer the three questions: 1) Am I meeting all the needs of the client; 2) Am I aware of all the client’s needs; 3) Am I committed to grow my company to meet the needs of those clients? These three question can lead to open opportunities for the company that may not have been explored in the past.

The brainstorm session is a way to create ideas in a safe and open environment where everyone has a chance to share and throw out ideas. By putting yourself in the place of the client, many business can identify flaws in their services and work towards ways to fixing those flaws. Some questions that can be discussed during the brainstorming session are:

  • How does the client define a successful relationship?
  • What do they value the most about our services?
  • What have we done for the clients that goes above and beyond?
  • How can we add value in a nontraditional way?
  • How are we capitalizing on the loyalty factor?

By orienting your business goals to fit the clients, you can maximize on what the client wants and increase your business at the same time. By regularly asking questions on business practices will keep your business relevant to your clients.

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Integrity and Objectivity: Making Independent Decisions

With more eyes watching, integrity and objectivity are key traits that all auditor should establish. Maintaining objectivity and integrity allows the auditor to establish their reputation as a fair and competent auditor. Integrity and objectivity of the auditors become very important in the validation of audits. Many auditors face difficult situations that can challenge their objectivity and integrity in many different ways. It is up to them to determine how to proceed when facing the challenges that affect their independent decisions.

All auditors shall remain free of conflicts of interest, and shall not knowingly misinterpret the facts. Auditors should never lower their judgments to other or come in with preconceived notions about the company they are auditing. An auditor’s integrity is the fundamental character trait that allows them to prevail with a client or superior influence that may impair their judgment. Many lesser men have changed with the pressure an important businessman has put on them, but an auditor should be able to stand behind their findings. By using a structured framework to make decisions, auditors are able to use professional judgment to remain independent with facts and findings.

An auditor’s objectivity allows them to see past anything that could persuade them to see thing differently. They can put aside personal relationships, professional interests, and evaluate any undue influence that could happen during the audit. If there was ever a violation of the integrity or objectivity, sever repercussions for the auditor and the company.

To avoid any conflicts, auditors should evaluate each situation. Auditors should determine if the situation will affect the safeguards or other protocols established in the company. If there is a breech in protocol that will have negative repercussions for the company then the auditor. Knowledge, experience, and skepticism are usually critical factors or professional judgment. Acknowledgment of what cognitive biases can affect decisions, is another critical component to keeping an independent mind for auditors.

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Discussing Internal Controls

In every business, there are control systems in place to maintain security. These internal controls are put in place to help prevent fraud and maintain the integrity of the company’s financial statements. With many smaller companies, these frameworks are as simple as separation of duties, but as you get into the larger companies, they can take a roll in the process of protecting financial records.

The Committee of Sponsoring Organizations (COSO) defines internal controls as “a process, affected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.” There are five components of internal:

  • The Control Environment: This is the set of standards, process, and structures that provide the basis for carrying out internal control across the organization.
  • Risk Assessment: This is a dynamic and repetitive process for identifying and assessing risks to achieve objectives.
  • Control Activities: The established actions through which policies and procedures ensure that management’s directives are carried out to achieve the objectives.
  • Information and Communication: Ensures that information is available for the company to carry out the internal control responsibilities that support the objectives.
  • Monitoring: Ongoing evaluations, either separate or combined, to ensure that eh other components are being carried out and are function for the intended purpose.

Each part of the internal control components have goals related to efficiency and effectiveness of operations including processes to minimize errors and time spent correcting errors. Each entity will have its own set of controls that work for the company, but good internal controls should be the cornerstone of the business. The discussion of establishing internal controls for a company should begin with the importance of integrity, ethical values, structure, authority, and responsibility. They should be developed with the company’s values in mind and each component should enhance the way the company runs with minimal additional cost.

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