Assurance - Fraud and other Risk Consideration

Question 1

Provide the two types of fraud and what are the characteristics of fraud

Answer 1

Two types of fraud
1. Fraudulent financial reporting - occurs at the management level through intentional omissions or manipulation of amount or disclosure in the F/S to deceive user and stakeholder

2. Misapprpriate of assets - assets usually occur at the employee level relative in relative, a small amount can be embezzlement, theft of asset

Characteristics of fraud are:
- Inadequate corporate governance
- Lack of “tone of the top”
- Inadequate internal control
- Complex business operations
- Large financial incentive

Question 2

Provide the three types of how fraud happen

Answer 2

1. Incentive/ pressure
   - External pressure, such as market and investor expectation
2. Rationalization
   - Large entities could rationalize, overstating N/I to obtain a bank loan & avoid laying off employees
3. Opportunity
   - Must perceive the opportunity for fraud to occur

• This is known through a fraud triangle - A model that details three fraud factors one or more are typically for it to occur.

Question 3

What CAS standard is used to help with auditors’ responsibility for fraud

Answer 3

CAS 240 describes that:
- Identify and assess the RMM of the F/S due to fraud
- Obtain SAAE regarding the assessment of RMM due to fraud through designing and implementing appropriate responses
- Respond approx. to fraud or suspect identified during the audit.

Question 4

Explain what professional skepticism is and how fraud-detection occurs

Answer 4

• Professional skepticism is used for auditor aims to conduct their work in such as way as to obtain reasonable assurance that F/S, taken as a whole is free from material misstatement

-Fraud detection is: - to make inquiries of management regarding their identification, communication, and response to fraud risk
- Make inquiries of both management & TWCG

Question 5

How do you fulfill the responsibilities of fraud and provide the RMM due to fraud

Answer 5

You fulfill the responsibilities related to fraud by:
1. Perform procedures to identify RMM due to fraud
2. Assess RMM due to fraud for OFSL & assertions
3. Communicate with management & TCWG

RMM due to fraud
- Auditors are to obtain SAAE to obtain reasonable assurance that F/S are free from material misstatement by fraud or error
- Risk of not detecting fraud is higher
- Look for unusual or unexpected relationships, obtain analytical procedures

Question 6

What are some examples of Incentive/ pressure, rationalization, opportunity

Answer 6

Incentive/ pressure - Bonuses and other minimal performance, increase market competition, additional users, tax minimization

Opportunities - Minimal owner involvement, weak control environment, no internal audit

Rationalization - Aggressive culture, management relaxed attitude, Avoid job loss.

Question 7

What CAS standard is used for any related party audit procedure

Answer 7

CAS 550 is used for procedures relating to related parties
1. Obtain understanding sufficient of related party relationships & transactions to achieve
a. Recognize potential fraud risk factor
b. Conclude whether the F/S is they are affected by RPT presented fairly
2. Obtain SAAE that RPT has been identified, recorded and disclosed in accordance with applicable FRF

Related party transaction
- There can be extensive and complex relationships and structures in place
- Information system may not effectively identify or summarize RPT
- RPT may not be conducted under normal market terms and conditions

Question 8

Explain what assessment and identification is used for RMM for a related party transaction

Answer 8

The identification of RMM is for CAS 315 & 240
- Specifically, consideration of the susceptibility of F/S to material misstatement due to fraud or error that could result from entity-related party relationship
- Making inquiries of management regarding the identity of any related party relationship

The assessment of significant risk - CAS 315
- Inquiries of management & related parties
- Conducting background research
- Inspecting contracts with related parties

Question 9

Explain how accounting estimate is determined and the six-step requirement under CAS 540

Answer 9

For accounting estimates - is the amount for which the measurement, by requirement of applicable FRF
Common are: AFDA, provision of litigation, FV of investment, inventory

CAS 540 six-step requirement
1. Obtain understanding of the client uses of estimate to identify and assess the RMM
2. Identify and assess RMM - Evaluating the degree os estimation
3. Respond to the assess RMM. Based on risk assessment , auditor must determine
4. Perform additional substantive procedures for significant risk - sensitivity analysis, assumption
5. Evaluate the reasonable estimate and disclosure and obtain written representation
6. Document the bias for conclusion