Audit Risk When Dealing With the Process of Massaging the Figures

Author:Lisa WEAVER, ACCA

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Keywords:earnings management, audit committee, fradulent financial reporting, incentive, audit report

Abstract:
In this article, there are going to be presented a series of aspects related to the activity of the professional auditors when it involves earnings management.\r\nA survey of audit committee members attending the 4th Annual Audit Committee Issues Conference, published by KPMG in 2008(1), identified the increased risk of earnings management as a top concern in the day to day activity of the professional auditors.\r\nEarnings management occurs when companies deliberately manipulate their revenues and/ or expenses in order to inflate (or deflate) figures relating to profits and earnings per share. In other words, it is when companies use ‘creative accounting’ to construct reported figures that show the position and performance that management want to show.\r\nIn cases where financial statements appear to have been misstated due to earnings management or fraudulent financial reporting, the auditor should carefully consider the implications for the audit report.\r\nAuditors therefore need to conduct risk assessment and audit procedures carefully, in order to fully identify indicators of manipulation, and to gather sufficient evidence to decide whether any manipulation is the result of bending or breaking financial reporting rules, for which the ultimate consequence may be a qualified audit opinion.

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