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.