Which method is performed by an external party to detect fraud?

Which method is performed by an external party to detect fraud?

• A. Internal Audit
• B. Management review
• C. Reconciliations
• D. External Audit

Answer: (D)

Fraud detection by an outside party relies on an external audit—an independent examination of the company’s financial statements and the controls that support them. Because the auditors are not part of the organization, their work provides objective assurance about whether material misstatements, including those from fraud, exist. They use procedures designed to uncover fraud risks, such as testing samples of transactions, vouching to source documents, obtaining third‑party confirmations, and evaluating evidence for consistency and reasonableness. This external perspective distinguishes it from internal methods like internal audit (conducted by the company to improve controls), management review (an internal, often self-assessing activity), or reconciliations (internal control steps to detect discrepancies). Therefore, the method performed by an external party to detect fraud is an external audit.

Fraud detection by an outside party relies on an external audit—an independent examination of the company’s financial statements and the controls that support them. Because the auditors are not part of the organization, their work provides objective assurance about whether material misstatements, including those from fraud, exist. They use procedures designed to uncover fraud risks, such as testing samples of transactions, vouching to source documents, obtaining third‑party confirmations, and evaluating evidence for consistency and reasonableness. This external perspective distinguishes it from internal methods like internal audit (conducted by the company to improve controls), management review (an internal, often self-assessing activity), or reconciliations (internal control steps to detect discrepancies). Therefore, the method performed by an external party to detect fraud is an external audit.