Abstract
PurposeThis study aims to investigate what are the capabilities and limits of external audit in detecting frauds in companies operating in the territory of the Republics: Serbia, Croatia, Macedonia and Bosnia and Herzegovina.Design/methodology/approachIn total, 51 certified auditors from Serbia, Croatia, Macedonia and Bosnia and Herzegovina were surveyed to analyze what are the most frequent warning signals of the existence of the frauds auditors encounter during the verification of company’s financial statements.FindingsThe 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 implicationsBased on the research results, it can be concluded that it is necessary to expand the legal obligation and power of external auditors when, in financial statement auditing, they come to clear findings that indicate fraud. Expansion of external auditors’ powers would reduce their current limitations and expand the domain of action.Originality/valueLimitations in external auditors’ work prevent the processing of frauds. However, auditors’ analysis of financial statements and pointing to potential irregularities can be a good manner for the early detection and prevention of frauds in company’s operations.
Highlights
Financial statements contain information used by a number of external and internal stakeholders for making many business decisions
To express an opinion on the accuracy of financial statements, it is necessary that the auditor is satisfied as to the accuracy of all balance sheet items in financial statements and in the disclosure of other relevant information by the management (Jovkovic, 2014)
The main objective of the research is to investigate what are the capabilities and limits of external audit in detecting manipulations in companies operating in the territory of the Republics: Serbia, Croatia, Macedonia and Bosnia and Herzegovina, as well as acquiring basic knowledge about the types and methods of manipulation in financial statements auditors face in their work
Summary
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. To increase customer confidence in the quality of financial statements, it is necessary that independent, external persons, review the statements and give an opinion on their quality. This is precisely the role and task of the external audit. Auditors must take the appropriate actions to identify the fraud, stabilize the situation and prevent continuing resource losses for their client (Smith, 2012)
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