How Auditors Can Help Detect Financial Frauds

Auditing is an important function for any company that wants to operate within the ambit of law. Auditors help to ensure that company operations are in compliance to applicable laws and regulations, and also identifies potential risks, and recommend corrective actions if necessary. Financial frauds by companies in India are growing. Financial Frauds can occur in any company but it is generally easy to identify financial in large corporate entities in comparison to smaller ones. Auditors have the role to assess and investigate malpractices to detect and prevent such financial frauds.
This article briefly describes the How Auditors Can Help Detect Financial Frauds, & Role of Auditor as per Company Laws in India.

What is an Auditor?

Professionals who work for a company to check that the company is following legal and ethical guidelines are called auditors. Changes in policies and procedures of the company is also done by them. Additionally, auditors can help to spot any potential financial problems that a company might be facing.

Role of Auditor as per Company Laws in India

Auditing is an important function for any company that wants to operate within the ambit of law. Auditors help to ensure that company operations are in compliance to applicable laws and regulations, and also identifies potential risks, and recommend corrective actions if necessary. Auditors can also provide valuable insights into a company’s performance and prospects for growth of the company.

Responsibilities of a Company’s Auditors Under The Companies Act, 2013

The auditor should certify that the financial statement is in accordance with the Generally Accepted Accounting Principles (GAAP).

The main responsibilities of an auditor include

• Reviewing and reporting of the financial statements of the company
• Making sure that the financial statements are in accordance with GAAP
• Giving suggestions for improvement 
• Reporting any suspected fraudulent activity to the appropriate authorities.

Types of Auditors

The role of auditor in companies is governed by company laws in different countries. The Primary Responsibility of auditors in India is to safeguard the financial health of companies including detection and prevention of digital fraud. Internal Auditor is an officer of a company who performs internal auditing functions as part of their job. They generally audit all the internal control over financial reporting and might also audit other areas such as compliance with applicable laws and regulations. External auditors are independent third parties whom the company hires to perform an independent audit. Governmental auditors are officers of government agencies who are hired by a company to perform an independent audit of its financial statements.

Preventing and detecting fraud

• Mandating the use of data analytics for fraud testing in audits for all listed entities globally 

• Use of additional internal and external data and information to enable more nimble responses to external risk indicators, such as short sellers and whistle-blowers 
• Use electronic confirmations for audit evidence wherever possible
• Developing a proprietary fraud risk assessment framework for use with audit committees and those charged with governance
• Requiring the use of forensic specialists in the audit on a targeted-risk basis

Types of Financial Frauds by Organizations 

There can be many kinds of financial frauds by organizations. Most Common financial fraud includes falsification of Accounts, misappropriation of funds, bribery and corruption.  Falsification of accounts and books of accounts they are the thoughtful misstatement of details in financial reporting and this is done by either overlooking details or inflating and reporting incorrect details. Misappropriation of funds is another form of common fraud that takes place it can happen in any manner for example by misusing the organizations funds for personal use or misuse of funds by senior employees or executives of the organization without approval. Individuals or organizations misuse their power or influence to gain financial advantage.

How can Auditors help in Detection of Financial Frauds?

Financial fraud is a very common crime in India. This crime can affect individuals, organizations, companies, banks and financial institutions, and also the Indian economy. An Auditor can prevent and detect financial fraud by various measures. Some of them are as follows:

• Detailed reviews of financial statements: Analysis of the financial statements of the organization can give the information about the operations and activities of the business. The auditor should analyse all the accounts and transactions including with inclusion of all the insignificant transactions.

• Reviewing of internal controls: Evaluation of the strength of the organization’s internal controls and management practices. All the procedures and controls should be followed in a proper manner. Reviewing of how the staffs training has been done and how do they to handle financial transactions. Any weakness that can be contributed to the fraud should be identified

• Investigate the irregularities: Auditor should keep his eyes on any irregularities that indicates the possibility of any financial fraud. Attention needs to be given to any transaction that is out of the norm or is not usual.

• Maintain confidentiality: Auditor should maintain confidentiality for all the information that is in relation to the clients and the auditing process. The information needs to be secured and protected from any misuse or any illegal use.

• Report fraud to the appropriate authorities: If an Auditor has identified any suspicious activity the auditor should immediately report to the appropriate authority for prevention of any damage.

Conclusion

In conclusion, auditors play a vital role in detecting financial frauds. They can identify potential red flags, analyze internal controls, conduct forensic audits, and report suspected fraud. Companies should engage experienced and competent auditors to help them prevent and detect financial frauds. By working closely with auditors, businesses can safeguard their assets, protect their reputation, and ensure compliance with regulatory requirements.