In the recent WorldCom accounting scandal, it appears that the WorldCom accountant simply put figures into the incorrect lines of his balance sheets. The auditors’ position was they they had not been provided with correct information and documentation. So my question is this:
How does any auditor ever know that any numbers they are signing off on are real. Suppose, in an extreme case, I start the ABC Corporation, and claim billions of dollars of revenue and profits. I call in a Big Four accounting firm and provide them with thousands of documents that purport to represent cash flow receipts, expenses and the like. Meanwhile, the entire company is completely imaginary. Can I get the auditors to sign off on my reports, as long as the accounting is being done correctly?
IOW, if proper procedure is followed, what is the auditor supposed to do to ensure that the numbers that they are being fed are accurate and complete?
(I’m particularly curious because - though no accountant - I do some accounting work in the capacity of actuary - relating to FAS 106 (retiree benefits). We rely heavily on information provided by our clients. Theoretically, they could give us bogus numbers and we would not know the difference. Our work is audited by the company’s general auditor - they ask about our actuarial assumptions and the like, and ask for information about a few randomly selected employees. But I don’t see how anyone would catch the company if they decided to fake it.)
I can only really speak for UK accounting and auditing principles, but one of the fundamental concepts is the reliability of audit evidence.
Written, independent third-party documentation is always to be preferred; any company that couldn’t provide any third-party documents would immediately be treated as suspicious and high-risk. For example, debtor and creditor circularisations and bank account balance confirmations are requested on client stationery and sent directly to the auditor, not via the client.
Additionally, sample stock counts are often performed for stock-holding companies; physical inspection of assets (to test the accuracy of the fixed asset register) is also commonplace. Accounting treatment of expenses is always reviewed for reasonableness (e.g. comparing a client’s calculation of depreciation against industry and product norms).
When it comes to a genuine absence of documentation, auditors can either choose to ignore it (if it’s immaterial), comment on it in the audit opinion, or refuse to issue an audit opinion. The latter option is unusual, since the auditor is effectively telling the shareholders that they cannot offer any professional opinion on whether the accounts are true and fair.
If someone really wanted to fake it, I guess they could, but they would have to have something, a warehouse with inventory or a store or a product or something.
Auditors will, at the very least, inspect the asset - the main income source of the business.
In my experience with auditors, even with large assets, the senior and partner usually don’t get invovled until the workpapaers are complete. Many times they depend on fresh outs or auditors with 2 - 3 years experience in lots of things but no real specialty area (ie shopping malls or automotives etc.) So, if someone really wanted to, it would be easy to pass stuff off or have stuff just not get noticed.
One of the first audits I went thru, before I got my degree, I had an auditor ask me why the balance on an account was not the year to date activity, but rather, had last years numbers rolled into it. Sheesh! it’s a balance sheet account, it will never reflect the total of year to date activity. :rolleyes:
Surely they should have said: “Provide us with a list of all invoices assigned in whole or part to Capital Expenditure” (which should be a relatively simple task from any accounting system).
Then go through the list and check out the orginal invoices - not all of them - just any that leap out from the page as iffy , and then some chosen at random. This task can be done by juniors.
You dont have to be an experienced super-accountant to realise that an invoice for stationery assigned to capital expenditure is BS.