Financial statement misrepresentation: the role of internal and external audit

Abstract

This paper focuses on the importance of internal and external audits in reducing misrepresentation or falsification of financial statements and examines the key characteristics, reasons, and methods for committing as well as confronting fraud. Electronic questionnaires were sent to stock-exchange-listed companies with an internal audit department. Descriptive statistics, factor analysis, and multiple regressions show that internal audit contributes significantly to reducing fraud. Factor analysis shows a significant internal audit contribution against fraud. Linear regression highlights the significance of variables concerning the reasons for falsification, external auditors' competence, and internal auditors' and audit committees' efficiency. Business fraud is organised and therefore difficult to detect, disclose, and prevent, especially when conducted by the board of directors; further, it is more common in businesses without control mechanisms. Audit's role is key in preventing and detecting fraud; it should act as a strong, internal, independent control function. Despite the importance of audit, the phenomenon of fraud, there has not been much empirical research on this issue.