Audit programs are designed with dual purposes: to test internal controls and tests of transactions including the different transactions cycles. To properly achieve the objectives of an audit program an auditor must understand the elements of internal control and their interaction. When dealing with an audit of financial statements it is crucial to understand the accounting system, control environment, and control procedures designed into the internal controls the Audit programs test management assertions and the audit objectives. The audit objectives is what the auditor intends to achieve through audit procedures. When auditing accounts, the audit objectives for each one are summarized as follows:
a) Ensure that all transactions are properly classified. Test of transactions are performed to determine whether the entity’s transactions are recorded and summarized correctly in the accounting records.
b) Verify that data are accurate in amount
c) Assess that transactions are properly valued
d) Verify the existence of items of interest
e) Ensure the timeliness when recording all transactions
f) Confirm that the client really owns assets and owes liabilities recorded
g) Ascertain proper disclosure of transactions
h) Establish completeness of transactions, all transactions must be recorded.
When audits are performed without following procedures that ensure proper tests through confirming, observing, retracing and vouching of transactions, performing analytics, inquiring, and re-computing calculations, auditors are exposed to lawsuits for gross negligence where "massive multiple audit failures" are brought against them. For example, a well-known payroll company had underpaid its federal payroll taxes and the auditors had repeatedly failed to report the financial problems of the company. The Complaint stated that the certified financial statements were "a sham" since the auditors missed several million in liabilities. This firm was to pay the payrolls to employees and to pay the payroll taxes to the government. However, according to the Complaint, the payroll firm significantly underpaid the taxes for years, and the auditors missed it “year after year.” The audit firm was engaged in deceptive and unfair business practices according to the lawsuit and, as a result, the auditor could face a request for compensatory damages and punitive damages.
Auditors should perform both, tests of transactions and tests of balances. Tests of balances are concerned primarily with monetary misstatements in accounts balances, these tests relate to individual accounts, whereas tests of transactions relate to the different transactions cycles. Sometimes, financial officers deceive auditors. For example, charges were filed against a chief accounting officer for conducting a multi-year fraudulent earnings management scheme and misleading outside auditors and internal accountants in order to conceal his wrongdoing. This CFO fraudulently decreased the company reported net income by recording improper accounting reserves during certain periods in order to meet or exceed analysts’ expectations for the company’s diluted earnings per share (EPS) and maximize yearly officer and senior employee bonuses. Later, the CFO began reversing these improper reserves in order to offset that company declining financial performance. And as it were not enough he improperly recognized revenue from the sale and leaseback on the financial statements and used secret side agreements in order to hide his misconduct from the external auditors.
Forensic accountants have the skills, knowledge, and abilities required to identify reckless or deceptive practices performed by auditors or chief financial officers.