AUD 3 - Fraud Risk

Question 1

What the three types of fraud? Define the types of fraud?

Answer 1

1) Fraudulent financial reporting - (lying) - intentional misstatements or omissions
2) Misappropriation of assets - (stealing) - theft of an entity’s assets
3) Corruption - (cheating) - violations of laws, bribes, unethical acts

Question 2

What are the three types of fraud risk factors?

Answer 2

1) Incentives/pressure - a reason to commit fraud
2) Opportunity - a lack of effective controls
3) Rationalization/attitude - an attempt to justify fraudulent behavior

*Rationalization/attitude can be minimized if there is ethics and integrity

Question 3

Why is fraud harder to uncover?

Answer 3

Fraud is difficult to detect because those engaged in the fraud will try to CONCEAL IT.

• Even a quality audit may not uncover fraud

Question 4

Define the tree types of response to assessed fraud risk?

Answer 4

1) Overall, General Response - assigning personnel to the engagement, unpredictability in selection of procedures (surprise audits)
2) Response encompassing audit procedure - determine the NET (nature, extent, and timing of audit)
3) Response addressing risk to management override - examine journal entries, accounting estimates, unusual transactions