Antifraud standard unveiled: new audit standard approved--SAS 99 'Consideration of Fraud in a Financial Statement Audit'.

• Author: Lanza, Richard B.

Stepping up efforts to fight corporate fraud, the Auditing Standards Board (ASB) of the AICPA approved a new standard, Statement on Auditing Standards (SAS) No. 99, Consideration of Fraud in a Financial Statement Audit (AICPA, Professional Standards, Vol.1, AU sec.316. Superseding SAS No. 82, which has the same title, SAS No. 99 provides auditors with additional guidance for detecting material fraud. "The standard reminds auditors that they must approach every audit with professional skepticism and not assume that management is honest. It puts fraud at the forefront of the auditor's mind," said AICPA president and CEO Barry Melancon

SAS No. 99's key provisions include the following:

* Increased emphasis on professional skepticism. The audit team needs to set aside existing beliefs about management's honesty and exchange ideas on how frauds could occur. The audit team members should keep in mind the incentives, opportunities, and ability to rationalize that usually precede fraud perpetration. The team's discussions should put the engagement team in a better position to design audit tests responsive to the risks of fraud.

* Discussions with management. The engagement team should ask management and others in the organization about the risk of fraud and whether they are aware of any frauds. The auditors should make a point of talking to employees in and outside management, thereby giving employees and others the opportunity and encouragement to "blow the whistle." Concern that a coworker will turn them in might also deter others from committing fraud.

* Unpredictable audit tests. The engagement team should test areas, locations, and accounts that otherwise might not be tested. From the client's viewpoint, the tests should be unpredictable and unexpected.

* Responding to management override of controls. The standard includes procedures to test for management override of controls on every audit. Chuck Landes, AICPA Director, Audit and Attest Standards, said that the AICPA "commissioned a number of independent academic research projects to help us understand how SAS No. 82 could be improved. SAS No. 99 is responsive to that research and incorporates recommendations from the Public Oversight Board's Panel on Audit Effectiveness." SAS No. 99 is effective for audits of financial statements for periods beginning on or after December 15, 2002. The AICPA, however, is urging firms, particularly those that audit public companies, to begin earlier...