The new standard is a result of extensive discussions with the Public Oversight Board and international standard-setters. It is also based on extensive research: for example, a recent study found that while auditors reacted appropriately to increased fraud risk by expanding tests and by using more experienced staff on engagements, the results were mixed on whether auditors changed the nature of their procedures.

The trade association is actively working with other key constituents and later this year will be issuing broad-based fraud deterrence guidelines and recommendations that will be directed towards audit committees and management.

The enhanced fraud detection standard:

• Mandates auditors search for fictitious entries and perform other tests in response to risks of management override. The proposed standard will require that these tests be performed on every audit of a public company.
• Provides additional guidance on how an auditor tests for improper revenue recognition.

Other significant requirements in the standard:

• Expand questioning of management and others within the entity. Topics would include, among others: management's awareness of any allegations of fraudulent financial reporting, management's understanding about the risks of fraud in the entity, and programs and controls that management has established to mitigate fraud risks and how management monitors them
• Determine how the audit committee exercises its oversight responsibilities and whether it has knowledge of any fraud or suspected fraud
• Ask internal audit personnel and operating management not directly involved in the financial reporting about their understanding of the risks of fraud in the organization and their procedures performed to identify or detect fraud, management's response to the findings, and whether they have knowledge of any fraud or suspected fraud.
• Share exchanges of ideas and insights among the audit team about how and where the entity's financial statements might be susceptible to material misstatement due to fraud.

The Exposure Draft, Consideration of Fraud in a Financial Statement Audit, can be viewed at http://www.aicpa.org/members/div/auditstd/consideration_of_fraud.htm

The date the standard goes into effect is for audits of periods beginning on or after December 15, 2002 and early application is permissible.

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