Question

Which of the following best describes an auditor's responsibility after noting some indicators of fraud?

A. Expand activities to determine whether an investigation is warranted.
B. Consult with external legal counsel to determine the course of action to be taken.
C. Report the possibility of fraud to senior management and ask how to proceed.
D. Report the matter to the audit committee and request funding for outside specialists to help investigate the possible fraud.

Answer 1

An auditor who identifies indicators of fraud is expected to expand their activities to further investigate the potential fraud before reporting these findings to the appropriate levels of management or the audit committee.

Step-by-step explanation:

When an auditor notes indicators of fraud, their responsibility generally entails the need to expand activities to determine whether an investigation is warranted. This means increasing the scope of the audit procedures to gather more evidence and determine the credibility of the fraud indication. It might not necessarily involve consulting with external legal counsel initially as the auditor's responsibility is to first assess the situation within the confines of the auditing process before escalating it.

If the preliminary assessment suggests that fraud may have occurred, the auditor should report the matter to the appropriate levels of senior management and possibly the audit committee, so they can decide how to proceed, which may include bringing in external specialists.