A3 (4) - FRAUD RISK Flashcards
Types of Fraud
1- Fraudulent Financial Reporting
2- Misappropriation of Assets
Characteristics of Fraud
1- Incentives/Pressures: a reason to commit fraud.
2- Opportunity: a lack of effective controls.
3- Rationalization/Altitude: fraudulent behavior
Management’s Responsibility
Design and implement programs and controls to
prevent, deter, and detect fraud.
Auditor’s Responsibility
Plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.
Audit Requirements
- Professional Skepticism
- Audit Procedures
3- Required Discussion Among Engagement Personnel
4- Inquire of Entity Personnel
5- Results of Analytical Procedures
Identifying Risks - Attributes of Risk
1- Type of risk
2- Significance of the risk
3- Likelihood of the risk
4- Pervasiveness of the risk:
Identifying Risks - Presumption of Risk
- Improper revenue recognition
2- Management override of controls
Identifying Risks - Additional Considerations
- The size, complexity, and ownership characteristics
2- The susceptibility of items to manipulation
Assessing Risks
1- obtain an understanding of the entity and its environment, including its internal control,
2- Specific controls may mitigate specific risks
3- An identified control deficiency may Increase the fraud risk assessment
Responding to Assessed Fraud Risk - General Response
(1) Assigning personnel to the engagement.
(2) Determining the appropriate level of supervision
(3) Evaluating management’s application of accounting principles
(4) . incorporate element of unpredictability every audit.
Responding to Assessed Fraud Risk - Specific Audit Procedures
1- Altering the nature, extent, or timing of audit procedures
2-Response may include both substantive tests and tests of controls,.
Responding to Assessed Fraud Risk - Response Addressing Risks Related to Management Override
1- Examine journal entries and other adjustments
2- Review accounting estimates for biases
3- Evaluate purpose for significant unusual transactions
Responding to Assessed Fraud Risk - Existence of Significant Fraud Risk
The auditor may consider withdrawing from the engagement.
Evaluating Audit Evidence
1-Discrepancies in the accounting records
2-Conflicting or missing evidential matter
3-Disagreements between the auditor and management.
4-Objections by mgrs.. to meet with audit committee
5- Accounting policies inconsistent with industry
6- Frequent changes in accounting estimates
7- Tolerance of violations of code of conduct
8- results of analytical procedures - unusual relationships
Final Evaluation
Communication among engagement personnel and may indicate the need to perform additional audit procedures
IF significant risk of material misstatement due to fraud remains, the auditor should consider withdrawing from the engagement.
Communications
1- Fraud that causes a material misstatement discussed with senior management and reported directly to those charged with governance.
2-Any fraud involving senior management, regardless of the impact to the FSs, reported charged with governance
3- Parties Outside the Entity To comply with certain legal and regulatory requirements,
Documentation Requirements
1-The planning discussion among personnel
2- The procedures made to obtain info .related to fraud
3- Identified risks of material misstatement due to fraud
4- support for conclusion of improper revenue I
5-The nature of communications made about fraud
ILLEGAL ACTS BY CLIENTS - Audit Procedures
1- Unauthorized or improperly recorded transactions;
2. Payments of unusual fines or penalties;
3. Payments that are unusually large or excessive,
4. Unexplained payments,
5. Investigations by governmental agencies .
6- known violations of laws or regulations; and
7. Failure to file tax returns or pay other appropriate fees.
ILLEGAL ACTS BY CLIENTS - auditor becomes aware of information concerning a possible illegal act
a. Understanding of the nature and its effect on the FSs;
b. inquire of management at level above those involved;
c. Consult the client’s legal counsel
d. Apply additional audit procedures, if necessary.
ILLEGAL ACTS BY CLIENTS - auditor concludes that an illegal act has occurred
a- Consider the effects of the illegal act on the FS
b. Evaluate the materiality of the illegal act,
c. Evaluate the disclosure of loss contingencies, for fines;
d. Consider the implications for other areas of the audit;
e. Communicate to those charged with governance
ILLEGAL ACTS BY CLIENTS - Effect of Illegal Acts on the Auditor’s Report
1- Departure from GAAP:- If the client refuses to revise the financial , a qualified opinion or adverse opinion should be issued with full disclosure of the matter.
2- Insufficient Evidence :- generally a disclaimer of opinion should be issued
3- Implications of Illegal Acts :- If the client fails to take
appropriate remedial action regarding any illegal act
the auditor may consider withdrawing from the engagement.
ILLEGAL ACTS BY CLIENTS - Communication of Illegal Acts
1- Those Charged with Governance
2- Parties Outside the Entity :- same like a fraud
