Auditing standards require financial statement auditors to identify and assess the risks of material misstatement due to fraud — and to determine overall and specific responses to those risks. Here’s why face-to-face meetings are essential when assessing these risks.
Audit inquiries
Fraud-related questions are a critical part of the audit process. The AICPA requires auditors to identify and assess the risks of material misstatement due to fraud and to determine overall and specific responses to those risks under Clarified Statement on Auditing Standards (AU-C) Section 240,
Consideration of Fraud in a Financial Statement Audit. Specific areas of inquiry under AU-C Sec. 240 include:
Whether management knows any actual, suspected or alleged fraud,
Management’s process for identifying, responding to and monitoring the fraud risks in the entity,
The nature, extent and frequency of management’s assessment of fraud risks and the results of those assessments,
Any specific fraud risks that management has identified or that have been brought to its attention,
The classes of transactions, account balances or disclosures for which a fraud risk is likely to exist, and
Management’s communications, if any, to those charged with governance about its process for identifying and responding to fraud risks and communications to employees on its views on appropriate business practices and ethical behavior.
Interviews must be conducted for every audit — auditors can’t just assume that fraud risks are the same as those that existed in the previous accounting period.
Beyond words
Although many audit procedures have been done remotely during the pandemic, auditors are now resuming face-to-face meetings with managers and others to discuss fraud risks. Why? Psychologists estimate that 7% of communication happens through spoken word, 38% through tone of voice and 55% through body language. So, a face-to-face interview is critical when evaluating fraud risks during an audit to help pick up on
nonverbal clues. Nuances such as an interviewee’s tone and inflection, the speed at which they respond, and body language provide essential context to the words being spoken. The auditor will also watch for signs of stress on the interviewee's part in responding to questions, including long pauses before answering, starting answers over, profuse sweating or tapping feet. In addition, in-person interviews provide opportunities for immediate follow-up questions. When it isn’t possible to have a face-to-face interview, a videoconference or phone call is the next best option because it provides the auditor with many of the same advantages as meeting in person.
