Quote:
Originally posted by moe.ron
Just wondering, shouldn't be there a yearly audit done by an independent firm?
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In this case, unless the auditor was really saavy in the area of forensic (fraud) accounting or there was something really unusual on the books which jumped out at him/her, whether or not an audit was done would largely be irrelevant. Here's why:
Contrary to popular belief, audits ARE NOT specifically designed to detect fraud and other acts of defalcation. Audits are intended to determine whether the financial statements presented were done with reasonable assurance that they were presented in accordance with GAAP (Generally Accepted Accounting Principles).
Audits work with figures that are ON the books, not figures that are or could possibly be OFF the books. So if the leadership was siphoning off funds for personal use which never hits the books, it would be unlikely that the auditors would catch it, because it goes outside the scope of their duties to do so. If fraud is detected, they are obligated to report it to management, but the operative word is IF.
Under these circumstances, a special forensic audit would need to be done to determine the scope and extent of fraud that was occuring in the organization. This audit would employ special tools and techniques that a regular financial statement audit would be much less likely to detect.
*man I wish this was a CPA exam question, cause I would've nailed it to the wall without breaking a sweat.*