The scope and limitations of external audit in detecting frauds in company’s operations
| DOI | https://doi.org/10.1108/JFC-11-2019-0155 |
| Published date | 13 March 2020 |
| Date | 13 March 2020 |
| Pages | 632-646 |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
| Author | Dragomir Dimitrijevic,Biljana Jovkovic,Suncica Milutinovic |
The scope and limitations of
external audit in detecting frauds
in company’s operations
Dragomir Dimitrijevic and Biljana Jovkovic
Department of Economics, Faculty of Economics, University of Kragujevac,
Kragujevac, Serbia, and
Suncica Milutinovic
Faculty of Economics Subotica, University of Novi Sad, Subotica, Serbia
Abstract
Purpose –This study aims toinvestigate what are the capabilities and limitsof external audit in detecting
frauds in companies operating in the territory of the Republics:Serbia, Croatia, Macedonia and Bosnia and
Herzegovina.
Design/methodology/approach –In total, 51 certified auditors from Serbia, Croatia, Macedonia
and Bosnia and Herzegovina were surveyed to analyzewhat are the most frequent warning signals of
the existence of the frauds auditors encounter during the verification of company’sfinancial
statements.
Findings –The study indicated that the auditors of the Republic of Serbia more often encountered
groundless overstatement of revenues compared with other countries, while regarding manipulative
representation of inventories,the largest mean value and median are still among the auditors of the Republic
of Serbia.
Practical implications –Based on the researchresults, it can be concluded that it is necessary to expand
the legal obligation and power of externalauditors when, in financial statement auditing, they come to clear
findings that indicate fraud. Expansionof external auditors’powers would reduce their current limitations
and expand the domainof action.
Originality/value –Limitations in external auditors’work prevent the processing of frauds. However,
auditors’analysisof financial statements and pointing to potentialirregularities can be a good manner forthe
early detectionand prevention of frauds in company’s operations.
Keywords Fraud, Financial statements, External audit, Early signals
Paper type Research paper
1. Introduction
Financial statements contain information used by a number of external and internal
stakeholders for making many business decisions. For this reason, financial statements
must be true and objective and need to show the real picture of financial situation and
earning power of a company. However, due to various manipulationsin practice, distorting
© Dragomir Dimitrijevic, Biljana Jovkovic and Suncica Milutinovic. Published by Emerald
Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0)
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legalcode
JFC
28,3
632
Journalof Financial Crime
Vol.28 No. 3, 2021
pp. 632-646
EmeraldPublishing Limited
1359-0790
DOI 10.1108/JFC-11-2019-0155
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