A3 (4) - FRAUD RISK

Question 1

Types of Fraud

Answer 1

1- Fraudulent Financial Reporting

2- Misappropriation of Assets

Question 2

Characteristics of Fraud

Answer 2

1- Incentives/Pressures: a reason to commit fraud.
2- Opportunity: a lack of effective controls.
3- Rationalization/Altitude: fraudulent behavior

Question 3

Management’s Responsibility

Answer 3

Design and implement programs and controls to

prevent, deter, and detect fraud.

Question 4

Auditor’s Responsibility

Answer 4

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.

Question 5

Audit Requirements

Answer 5

1. Professional Skepticism
2. Audit Procedures
   3- Required Discussion Among Engagement Personnel
   4- Inquire of Entity Personnel
   5- Results of Analytical Procedures

Question 6

Identifying Risks - Attributes of Risk

Answer 6

1- Type of risk
2- Significance of the risk
3- Likelihood of the risk
4- Pervasiveness of the risk:

Question 7

Identifying Risks - Presumption of Risk

Answer 7

1. Improper revenue recognition

2- Management override of controls

Question 8

Identifying Risks - Additional Considerations

Answer 8

1. The size, complexity, and ownership characteristics

2- The susceptibility of items to manipulation

Question 9

Assessing Risks

Answer 9

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

Question 10

Responding to Assessed Fraud Risk - General Response

Answer 10

(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.

Question 11

Responding to Assessed Fraud Risk - Specific Audit Procedures

Answer 11

1- Altering the nature, extent, or timing of audit procedures

2-Response may include both substantive tests and tests of controls,.

Question 12

Responding to Assessed Fraud Risk - Response Addressing Risks Related to Management Override

Answer 12

1- Examine journal entries and other adjustments
2- Review accounting estimates for biases
3- Evaluate purpose for significant unusual transactions

Question 13

Responding to Assessed Fraud Risk - Existence of Significant Fraud Risk

Answer 13

The auditor may consider withdrawing from the engagement.

Question 14

Evaluating Audit Evidence

Answer 14

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

Question 15

Final Evaluation

Answer 15

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.

Question 16

Communications

Answer 16

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,

Question 17

Documentation Requirements

Answer 17

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

Question 18

ILLEGAL ACTS BY CLIENTS - Audit Procedures

Answer 18

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.

Question 19

ILLEGAL ACTS BY CLIENTS - auditor becomes aware of information concerning a possible illegal act

Answer 19

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.

Question 20

ILLEGAL ACTS BY CLIENTS - auditor concludes that an illegal act has occurred

Answer 20

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

Question 21

ILLEGAL ACTS BY CLIENTS - Effect of Illegal Acts on the Auditor’s Report

Answer 21

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.

Question 22

ILLEGAL ACTS BY CLIENTS - Communication of Illegal Acts

Answer 22

1- Those Charged with Governance

2- Parties Outside the Entity :- same like a fraud