Guide to Using International Standards on Auditing in - IFAC

76
<strong>Guide</strong> <strong>to</strong> <strong>Using</strong> <strong>International</strong> <strong>Standards</strong> on Auditing in the Audits of Small- and Medium-Sized Entities Volume 1—Core Concepts
Anti-fraud controls can be designed <strong>to</strong> address all five internal control components. However, in relation <strong>to</strong>
risks of material misstatement in the financial statements, special emphasis is placed on the <strong>to</strong>ne set at the
<strong>to</strong>p of the entity. This addresses the attitudes and actions of management <strong>to</strong>ward control, and is part of the
control environment (see Volume 1, Chapter 5.3 above) which influences the control consciousness of all
personnel. A good “<strong>to</strong>ne at the <strong>to</strong>p” is considered by far the most effective anti-fraud control of all.
Two examples of anti-fraud controls applicable for smaller entities include:
• Journal entries
Non-routine journal entries have often been used by managers <strong>to</strong> commit fraud. A policy that nonroutine
journal entries (over a specified amount) must be supported by an explanation and manager’s
signature (indicating approval) is a simple anti-fraud control that can be implemented in any size entity.
Such a policy empowers the entity’s accountant <strong>to</strong> always ask the manager (requesting an entry) for
an explanation and approval. This will not necessarily s<strong>to</strong>p a senior manager from demanding an
inappropriate entry <strong>to</strong> be made, but the thought of having <strong>to</strong> physically document the approval and
provide an explanation may be enough <strong>to</strong> deter the request from ever being made in the first place. If
it does not deter the request, the audi<strong>to</strong>r may notice that the entry was not approved and ask why. This
could then lead <strong>to</strong> further investigation.
• Segregation of duties
In smaller entities, the accountant or bookkeeper is often in a trusted position, with minimal supervision
and therefore ample opportunity <strong>to</strong> commit fraud. One possible (but somewhat costly) anti-fraud
control would be <strong>to</strong> hire a part-time bookkeeper <strong>to</strong> take over that person’s job for at least one or more
weeks per year, such as when the accountant is on holiday or performing other tasks. The policy of
employing a replacement could deter the bookkeeper from committing fraud at all, and if fraud is
already taking place, the replacement policy might provide an opportunity <strong>to</strong> detect it.