Internal Audit

The Role of Internal Audit in Fraud Prevention and Detection

(Journal Review)

Name :
Mikhael Andre Kurniawan (232017504)

International Class of Management and Accounting Program

Faculty of Economic and Business
Universitas Kristen Satya Wacana
Salatiga
2019
The Phenomenon

From the Modern Era on, the state was the main institution interesting in implementing and
supervising the accounting system in order to prevent, detect, and punish any fraud committed,
both in its structures and in the public sector. And as the economic organisations became more
complex and powerful in society, they also started to employ the services of specialist
functionaries or accountants with the aim of maximising their profit and avoid losses or thefts by
means of distorted or erroneous financial entries. The industrial revolution brought a quick
economic development, but also an increased interest in the systems of capital, investment, and
control of transactions (Lesourd, J.A., Gerard, C., 1986, vol. 1).

In this case it is normal that the accounting system needs more supervision because there are so
many possibilities of fraud. In the book Internal Audit (Valery G. Kumaat) Part V : Fraud
Auditing, it has been mentioned that the high risk factor for fraud is the human being himself
with various reasons from within himself for committing despicable actions. These business
criminals can be categorized in 2 terms:
- White collar crime (committed by those who have higher positions in management)
- Blue collar crime (committed by those who have lower positions in management)

Defining Fraud

The fraud negatively affects an economy as a whole, by causing huge financial losses,
weakening social stability, threatening democratic structures, leading to a loss of trust in the
economic system, or corrupting and compromising economic and social institutions (Nicolescu
C., 2007, p. 92).
As a result of the numerous famous fraud cases discovered at the beginning of the 21st century
within some of the most prestigious multinational companies, this vision regarding fraud
prevention has radically changed. Nowadays, fraud is considered to be one of the most important
risks that an organization is exposed to, having a close connection to market, credit, judicial or
reputational risks (Munteanu V., Zuca M., Zuca S., 2010, p. 33).
It has been mentioned that the impact of fraud activities that can damage the structure and system
of a body. So what are the factors that make fraud possible?
- Authentic Cause (Factor where humans are the culprit or rather the personal character of
the human being)
- Organic Cause (Factors originating from human groups / communities therein.
- Systemic Cause (Factors resulting from system tools or from policy makers).

Responsibilities in Fraud Prevention and Assessing fraud risk

The internal audit refers to (Boulescu M., 2003): a permanent review of the economic activity of
an entity; an independent activity of assessing on behalf of the economic entity’s management
that involves examining the financial, accounting, and other kind of operations concerning the
services as a whole; an evaluation of tasks and conformity of the accounting entries, reports,
assets, capitals, and results; or an attestation or certification of financial accounting documents.
The responsibilities concerning fraud prevention within an organisation are divided between the
executive board, the audit committee, and the internal audit (Munteanu V., Zuca M., Zuca S.,
2010, p. 34).
According to the National Standard on Audit 240 ‘Fraud and Error’ (SNA 240), some guidelines
are established regarding fraud risk assessment. When planning the audit, the auditor must assess
the risk related to the fact that fraud and error can lead to significant misrepresentations in the
financial reports and he must request from the management information about any substantial
fraud or error discovered.

Facing fraud, the audit team must have a sharp intuition to see various internal aspects of the
company that are prone to fraud. However, auditing is not possible to work based only on the
standard audit rules / methods. In addition to implementing risk-based audits, audits also need to
develop "spy" network activities. And this cannot be carried out alone by internal auditors,
whose identities are easily known in the company. In the context of detecting fraud, there are
several steps that must be taken:
- Mapping (Aiming to identify critical points of risk of fraud).
- Observing (Aiming to deepen all risk points based on the actual situation on the ground).
 - Verifying and Analyzing (Aiming to conclude that fraud may or may be prone to occur).

Conclusion

Fraud is the biggest danger in the corporation, as well as the biggest risk that determines the
perception of the success or failure of internal audit performance, especially if the actors usually
have a level of intelligence above the average. Although fraud is generally exposed, an audit
system that is built in a related and sustainable manner should be able to detect its characteristics.
To expose fraud practices, the auditor must recognize the characteristics of the perpetrators and
the various possible forms of fraud that could emerge. Effective detection can be done by
running a risk-based audit model and building a network of informants (Audit intelligence).
Then, a capable audit team must be prepared (Investigative Auditor).