Assessing and Responding to Fraud Risks Flashcards
Types of fraud
Fraudulent financial reporting
Misappropriation of assets
Fraudulent financial reporting ?
is an intentional misstatement or omission to deceive the user. (overstate or understate income)
Misappropriation of assets
involves theft of assets usually by internal parties but can be external sometimes
conditions for fraud ?
- incentives/pressure
- opportunity
- attitude rationalization
Incentives/pressure for fraudulent financial reporting ?
low profitability or low ability to repay debts and trying to reach budget or analysts forecasts or condition for debt convents or mangers trying to earn bonuses
opportunities for fraudulent financial reporting ?
existence of accounting estimates and judgements , weakness if ais and internal control and high turnover of accounting and information technology employees .
Attitudes/rationalization fraudulent financial reporting
managerial disregard of financial reporting process and desire to reach overly optimistic forecasts and lack of ethics
Misappropriation of assets incentive/pressure ?
financial pressure on employees or dissatisfaction with the company
Misappropriation of assets opportunities ?
easy access to cash or inventory and weakness of internal controls and lack of adequate separation of duties
Misappropriation of assets attitudes/rationalization
management’s attitude towards ethics
sources of information to asses fraud risks
communicate among the audit team inquiries of management risk factors analytical procedure other information
communication among the audit team
may reveal poor controls or suspicious observations by the audit team
inquiries of management
management could be suspicious or aware of fraud happening ,they should always be asked about knowledge of any fraud and what they did to deal with it
risk factors
the auditor has evaluate the existence of risk factors , the existence of one or more does not definitely means there is fraud but more attention has be given to the issue
Analytical procedures
may show a difference between the auditors expectations and the reported figures which could be the result of hidden fraud
other information
maybe obtained through risk assessment and reputation and employees
what is the auditor’s response to fraud risks
- changing overall conduct of the audit (adding fraud specialists and unpredictability to the audit procedures to meet fraudster’s possible familiarity with the traditional process)
- designing and performing audit procedures to address fraud risks at the assertion level
- designing and performing procedures to address management override of controls
what if fraud is suspected ?
an auditor should gather additional information by inquiries of management and other parties to obtain new info or corroborate or contradict prior info or to determine if individuals are deceptive
also using audit software analysis CAATs and use of expanded substantive testing
main type of revenue manipulation of fraudulent financial reporting
- fictitious revenue (fake revenue)
- premature recognition of revenue
- manipulation of adjustments to revenue (sales return bad debt expense)
main type of revenue manipulation regarding misappropriation of assets
- failure to record a sale (steal cash or inventory without recording )
- theft of cash after sale is recorded (sale return , bad debt allowance)
main type of Accounts payable or purchases manipulation of fraudulent financial reporting
- not recording a/p until subsequent periods
- fictitious reductions to account payable
main type of accounts payable and purchases manipulation regarding misappropriation of assets
- issuing payments to fictitious vendors and stealing the money
- stealing payments to real vendors
Fraud risks in fixed and intangible assets
fraud risks in payroll accounts
-overstating inventory
-overstating costs
-manipulating fringe benefits
creation of fictitious employees and stealing their salaries
