Question 5: all companies are vulnerable to fraud, but small business are particularly vulnerable. Why do you think this may be the case? What signs of possible fraud may be more pronounced in small business when compared to larger ones?
Small businesses are particularly vulnerable to fraud because of the following reasons:
Lack of effective internal controls. Small businesses lack sophisticated financial controls that are necessary to reduce occupational fraud. Often employees handle many duties which many duties making it easy to cover the audit trail that would otherwise be used to uncover fraud.
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Inadequate reporting – smaller companies do not have hotlines hence it is difficult for employees, customers, and vendors to report any instances of employees.
Lack of financial annual audits - On one hand, businesses are likely to have higher levels of trust hence are less likely to be audited or safeguarded. Without internal audits smaller businesses are often unable to uncover fraud. In addition most businesses are likely not to have financial audits. According to Association of Certified Fraud Examiners, companies that incur few losses from fraudulent activities have their audits done on an annual basis. Compared to small companies, larger companies have made financial audits a staple activity to uncover fraud.
Lack of risk awareness. Usually, small business owners are honest, hardworking and have very close relations with their employees including auditors. Most of the time believing workers is not well-founded. This is unlike big companies where owners are aware of how risky it is to entrust employees with most of the work. The goal is to try and strike a balance by not giving too much or too little trust to employees. This way small businesses will be able to escape or minimize fraudulent activities sequentially minimizing the loss.
Question12: Do you think the concept of materiality is incompatible with ethical behavior? Consider in your answer to how materiality judgments affect risk assessment in an audit of financial statements.
No the concept of materiality is not incompatible with ethical behavior. Most professionals working in various organizations use estimates or alternatively confidence intervals to determine amounts Materiality is used in audits to keep a cost-benefit approach to accounts and amounts. Furthermore by definition materiality refers to the relative importance of an event or item
Materiality allows the accountant to ignore other accounting principles with respect to items that are not categorized as material.
For instance, if the cash balance is off $100 USD, the auditors would have to incur a cost of more than $100 to find and correct errors. Materiality, however, is likely to pose a challenge to the auditor if they find out that differences and corrections are never made in financial statements.
It is also worth noting that if materiality is used as an excuse so that financial statements remain erroneous, the company may be facing issues with integrity. This is likely to affect the integrity of the audit as well as the financial statement.
