Feb 13: Audits and Fraud
– Audits – people assume that this is a financial audit
– Several types of other audits: tax, operational, compliance, financial
1. Sales tax
– Charge on goods (HST) levied by the government
– Government will do a periodic review to check that the company charges
and sends tax on a timely basis.
– Often people are audited because there is a large change in activity
2. Payroll tax
– Companies must deduct taxes by law – income tax, Canada pension plan,
– See if company is properly deducting taxes.
3. Income tax
– Profits must be on personal tax return if it is a sole proprietor.
– vs. Corporation: many owners. Distinct legal entity. Will not audit person's
– If a company spends a lot on business expenses, Rev. Canada only lets you
deduct part of the expenses – permanent different
– Procedures in place are still being followed?
– Looks at integrity of information
– Do the right people have the right access to data?
– Is the inventory process looked after?
– Auditors will often come in quarterly. Strong relationship with auditors
throughout the year
– looking at the assessment of risk for a company
– If you don't have an internal auditor, an external viewer may be asked
– People may often hide debt they have incurred. Tendency for organization to
omit items that do not look good on a record – i.e. Overstate revenues –
investors know conflict of interest exists. Skepticism of financial information
– Main role – external professional auditors lend credibility/enhance credibility
– Can eliminate conflict of interest. Audits are paid for by company now, so it
is debatable if there is still no conflict of interest – there may be bias so the
auditor won't be fired.
Relationship b/w Accounting and Auditing
– Accountants/management make the entries. Auditors simple must state that
the company complies with accounting principles, enhancement of a faithful
representation. – Auditors determine whether it reflects the economic transactions of the
company and the general standards
– Cannot sue an auditor, because auditor does not deal with business risk.
Business Risk vs. Information Risk
– People buy stocks based on what they believe about the company in the
– Lenders will lend money if there is a good risk on it