An investigation into fraud prevention and detection of small businesses in the United States: responsibilities of auditors, managers, and business owners

Gary G Johnson and Charryl L. Rudesill

Accounting Forum, 2001, vol. 25, issue 1, 56-78

Abstract: Previous studies of fraud prevention and detection in American companies have primarily targeted a general business audience and were published before Statement on Auditing Standard No. 82, Consideration of Fraud in a Financial Statement Audit, was issued in early 1997. No post SAS No. 82 published studies were found that directly addressed the issues of fraud in the context of small business. The main objectives of this study were to identify: (1) the issues of fraud in the context of small U.S. businesses, (2) the fraud prevention and detection procedures used by CPAs specializing in small business engagements, and (3) the perceived impact of SAS No. 82 on audits of small businesses. It was found that CPAs specializing in small business engagements believe the three most effective fraud detection procedures are observing how cash receipts are processed, evaluating management overrides of computer controls, and testing physical inventories. They rate segregation of duties as the most effective fraud prevention measure while having a written code of ethics is viewed as the least effective measure. Most small business practitioners believe the severity of a fraud problem is a function of the effectiveness of the control system that management has implemented and the level of management monitoring. Sixty‐six percent of small business practitioners believe it is too soon to determine if SAS No. 82 will enhance the likeli‐hood of detecting fraud in small businesses, but implementing the new standard will require more work on the auditor’s part to evaluate internal controls and plan the audit accordingly.

Date: 2001
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DOI: 10.1111/1467-6303.00055

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