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identify the effect on the financial statement on the following senarios: a) a client fails to...

identify the effect on the financial statement on the following senarios:
a) a client fails to discover employee Fraud on a timely basis because bank accounts are not reconciled monthly.
and state how an auditor may reduce the risk.

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Answer #1

The effect of non detection of an employee fraud due to non reconciliation of bank statements can lead to overestimation or underestimation of cash balance in the books or the cash balance at the bank. This reflects deficiency in control risk and may lead to gross misstatement of the figures in the financial statements. Also , inappropriate adjustments or journal entries can be recorded to adjust the non reconciled figures. The risk of material misstatement in the financial statements increases due to a fraud. The auditor may reduce the control risk through use of substantive procedures through testing the internal control thoroughly in all aspects and noting any deficiencies therein. Also, due professional care and judgement must be applied while auditing critical accounts such as cash and bank balances.

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