5.2 - Characteristics of Fraud

Question 1

What are the two types of fraud causing material misstatements in the financial statements?

Answer 1

• fraudulent financial reporting
• misappropriation of assets

Question 2

What does fraudulent financial reporting involve?

Answer 2

Involves intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users

Question 3

What does misappropriation of assets involve?

Answer 3

Involves the theft of an entity’s assets and is often perpetrated by employees in relatively small and immaterial amounts. However, it can also involve management who are usually more capable of disguising or concealing misappropriations in ways that are difficult to detect