A3-Fraud Risk

Question 1

FRAUD RISK

Types of Fraud

Answer 1

1. Fraudulent Financial Reporting(lying)-intentional misstatements or omissions of amounts or disclosures in the financial statements that are designed to deceive financial statement users
2. Misappropriation of Assets(stealing)-misappropriation of assets, or defalcation, involves theft of an entity’s assets when the effect of the theft causes the financial statements not to be presented in conformity with GAAP.
3. Corruption=cheating

Question 2

FRAUD RISK

Fraud Risk Factors

Answer 2

1. Incentives/Pressures- a reason to commit fraud
2. Oppotunity-a lack of effective controls
3. Rationalization/Attitude-an attempt to justify fraudulent behavior

Question 3

FRAUD RISK

OBTAINING INFORMATION

The auditor should perform the following procedures to obtain information useful in identifying potential fraud risk

Answer 3

1. Inquire of Entity Personnel regarding their views of fraud risk-direct inquiries to mgmnt, employees involved in financial reporting, operating personnel, internal auditors, in house legal counsel, those charged with governance
2. Consider the results of analytical procedures-auditor required to perform analytical procedures in planning the audit, and should consider the implications of any unusual or unexpected relationshiop identified.
3. Evaluate FRaud Risk Factors-auditor should use professional judgement to determine whether and to what extent such conditions are present.

Question 4

FRAUD RISK

Identifying Risks

Answer 4

1. Attributes of Risk-types, significance, likelihood, and pervasivenss of risk
2. Presumption of Risk-presumption in every audit that two risks exists
   
   • improper revenue recognition
   • management override of controls
3. Additional considerations
   
   • whether and to what extent the three fraud risk factors are present
   • size, complexity, and ownership characteristics of the entity
   • susceptibility of items to manipulation-more susceptible when they involve high degree of mgmnt judgment and subjectivity; high complex accounting principles