Why Audits cannot detect all Fraud? By W. Steve Albrecht and Jeffrey L. Hoopes
This article revisits the concept of an audit’s inability to detect fraud, which is accepted
upon by GAAS. It shares us the experience of an expert witness who talks about what are
the cases and situations in which an audit can and cannot detect fraud and the underlying
reasons for it.
The role of an auditor was defined as a protector-“the public watchdog”, who provides
public with unbiased audited financial statements of companies. That is, to protect the
public investor from financial fraud.
Frauds can happen because either because they go undetected, or they are intentionally hid
by the auditing firm.
The most common reason due to which frauds go undetected is from material
misstatement. There are two kinds of audit: the financial statement audit, which deals with
the entirety of a company’s financial statements and the fraud audit, which takes into
consideration the finer details and loop-holes in which a possibility of fraud could have
occurred. This is usually more expensive and time-consuming.
Unfortunately, performing fraud audits is the only way to satisfy the expectations that
“financial statement auditors always detect material financial statement fraud”. Overstating
revenues and assets which yields to a materially misstated financial statement was the
majority “type” of frauds which the author witnessed. The auditing company was sued for
not being able to detect fraud, ranging from a few million dollars of fraud and
misstatements of billions of dollars.
The second case, in which the audit company intentionally creates fraudulent financial
