Managing Fraud Risk: A Practical Guide for Directors and Managers

The Role of Audit in Fraud Prevention and Detection

Introduction

Broadly, an audit is an evaluation process. There are many different types of audit today, including quality audits, energy audits and regulatory audits. We consider here the two that are most important from an anti-fraud perspective: external auditing and internal auditing. Later on in the Chapter we will look at the role of the audit committee, the mechanism by which many organisations look to provide oversight of the audit process and ensure that it delivers effective work in line with auditing standards.

Audit is often thought by non-specialists to look particularly for fraud and therefore to play a crucial role in reducing fraud risk. It is certainly true that well-directed fraud auditing has a very important part to play, especially in deterring people from committing fraud and in uncovering fraudulent schemes that are operating within organisations. In my view, however, directors and managers sometimes place too much reliance on traditional audit work to manage their fraud risk. By traditional auditing I mean in particular work based on the selection of a small sample of items for testing out of a much larger population of transactions, so that each item in the population has an equal chance of being selected. This is often carried out by auditors who have little understanding of fraud risk factors, no specialist fraud awareness or any investigation training and no appropriate audit tools. I believe that traditional ...