©2009 CCH. All Rights Reserved. Chapter 427Chapter 4Detecting Fraud in Financial ReportingCHAPTER SUMMARYOverviewAccounting experts continue to debate the role of auditors in uncovering fraud. In the following sections, the current role of the independent auditor; the role of the internal auditor, the audit committee, and management; and the role of the forensic accountant are outlined. The last sections of the chapter describe in more detail the forensic accountant’s role and describe fraud detection guidance from authoritative sources. Definitions of Fraud ¶4001 What Is Fraud? The chapter covers different definitions of fraud in the textbook. The instructor can discuss several of them.Responsibilities and Roles in Financial Reporting ¶4005 Independent Audit Procedures and the Auditor’s Role Analytical procedures are used to get a better idea of the client’s business and to identify areas of audit risk. The auditor must understand the implications of various risk factors to plan the financial audit and must also determine whether any specialists are needed to assist the audit. Audit evidence is gathered in two fieldwork stages: (1) the internal control testing phase, and (2) the account balance testing phase. Auditors apply audit procedures to obtain reasonable assurance that the financial statements are free of material misstatement. Auditing procedures also must include procedures to detect fraud. The primary objective of the auditor’s examination of financial statements is to express an opinion about whether the financial statements present fairly, in all material respects, values of assets and liabilities in terms of GAAP. Materiality, control risk, inherent risk, and detection risk must be considered. External Auditors and Fraud Detection.Although auditors have previously had the responsibility to detect material misstatement caused by fraud, SAS No. 82 details much more precisely what is required to fulfill those responsibilities. Now, auditors must specifically assess and respond to the risk of material misstatement due to fraud and must assess that risk from the perspective of the broad categories listed in the SAS. In addition, the external auditor has to satisfy new documentation and communication requirements. Limitations of Audits and Auditing Standards.Basically, generally accepted audit standards (GAAS) are not designed to catch fraud other than financial statement fraud. Independent auditors are not charged professionally with finding asset fraud, merely material misstatement of financial statements. Panel on Audit Effectiveness Recommendations.In October 1998, the Public Oversight Board, at the request of the then SEC Chairman, Arthur Levitt, appointed the Panel on Audit Effectiveness. Its charge was to review and evaluate how independent audits of the financial statements of public companies are performed and to assess whether recent trends in audit practices serve the public interest.