The internal auditor’s roles in the prevention and detection of fraud

Abstract

Purpose: The aim of the study is to ascertain the roles and responsibilities of the Maltese internal auditor with regards to fraud prevention and detection and to establish the extent of their contribution towards fraud. It also seeks to identify and assess how the standards are used for the prevention, detection and response to different types of fraud. Lastly, the study examines the effectiveness of policies and procedures in place and identifies possible improvements to the internal audit function. Design: The objectives of this study were achieved through the conduct of 13 semistructured interviews with chief internal auditors working in various Maltese companies having an in-house internal audit function. Findings: The study’s results show that Maltese internal auditors contribute to the prevention and detection of fraud majorly by ensuring the effectiveness of the internal control system and providing recommendations for more robust fraud preventive measures and controls. Internal auditors may also evaluate the adequacy and adherence to written policies, establish a link between antifraud control activities and identified fraud risks and review the flow of information. Various views were obtained on how local internal audit units apply the standards. The most effective procedures are deemed to include surprise audits, test of controls, exception reporting and reasonableness testing. To enhance the value given, internal audit units should be equipped with better analytical tools and provided with continuous training. Conclusions: Internal auditors are one of the three lines of defence which through their various roles can effectively contribute towards preventing and detecting fraud. The role of internal auditors in responding to fraud is a combination of standards prescribed externally and policies established internally. Internal auditors should have sufficient knowledge to evaluate the risk of fraud, report any identified fraud risk, be alert to warning signs, and respond in line with the organisation’s policies. The audit procedures utilised will ultimately determine how effective internal auditors are in detecting fraud. Value: Maltese companies and internal auditors can adopt the recommendations included in the study in order to improve the internal auditors’ roles in preventing and detecting fraud.