Refresh your audit planning and fraud assessment

As we roll into audit season, would be wise to revisit your audit planning and risk assessment. Gary Zeune can help you do that in his superb article, Fraud: The 15 biggest risks for 2013.

He reminds us that we really, really need to understand our clients and their overall environment. We need to look at fraud from different angles all the time.

Try these ideas to refresh your thinking:

#1 – Are there things going on in DC or issues for which nothing is happening that could devastate your client’s industry? If so, you need to pay attention to the action or lethargy in play.

#2 – Don’t rely on your client to tell you everything you know about the industry. His great example – if your newspaper client tells you the industry is doing great and that’s all you know of the industry, your entire audit is in trouble.

#3 – Probably a good idea to do a google search before you start the audit. Here’s my description – How could you explain to a jury you didn’t know the Justice Department had indicted several of the major players for doing something that your client does routinely? What the jury might conclude is that you should have two years in advance that your client wouldn’t survive a similar suit against them well after you issued your opinion.

#10 – Here’s one I’d never thought of:

Unclaimed property fraud risk: Failure to escheat unclaimed funds is very common. Do you know how much is being illegally retained? What’s the effect on financial reporting? If unclaimed funds were taken back into revenue to meet loan covenants, now you may have bank fraud and the loan may become immediately due and payable. Fraud risk: What audit procedure do you use to assess the amount, the effect on cash flow, and is there a going concern issue?

Escheat funds are probably going to be immaterial practically every time you see it. However…

If that critical loan covenant is 1.013 with a requirement to be 1.00 or greater, something really small could swing the ratio. That could turn restoring stale checks to income or that little ‘ole, itty bity a/p cutoff issue something that is quite material.

If done intentionally, that would be fraud.  If funds weren’t remitted to the state, and if it was intentional, and if there’s a bank loan, your client is tiptoeing into the neighborhood of bank fraud. While that is an unlikely string of ‘ifs’, it’s a really, really bad neighborhood for loitering. Not someplace I want to hang out.

Industry specific risk #1 – Do some of your NPO clients control a small NPO or two that they are using for a minor program. Have they reactivated one of them for a major new program? Did the IRS revoke the inactive NPO’s exempt status because a 990-N hasn’t been filed? If so, that NPO is now a for-profit company. Raising tax-deductible contributions or getting a property tax exemption would be illegal and possibly fraudulent.

Solution? Check the exempt status of your client and their subs before you start the audit. I do that every year.

You can already tell I think you should re-read this article during the planning stage of every audit. Check it out.

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