Ch.7 Fraud Flashcards
Technical Competencies:
- Assess the entity’s risk assessment processes
- Assesses the risk of the project, or for audit engagements, assesses the risk of material misstatement at the financial statement level and at the assertion level for classes of transaction, account balances, and disclosures
Technical Competencies:
- Assess the entity’s risk assessment processes
- Assesses the risk of the project, or for audit engagements, assesses the risk of material misstatement at the financial statement level and at the assertion level for classes of transaction, account balances, and disclosures
What are the two types of fraud?
Financial reporting and misappropriation of assets
What are some characteristics of fraud?
Fraud is the deliberate misrepresentation and the concealment of information. Some conditions create an environment for fraud:
- inadequate corporate governance
- lack of tone at the top
- inadequate internal control
- large financial incentives
- complex business operations
- high expectations by investors
Can you explain what the fraud triangle is and it’s components?
Fraud triangle implies that more than one element is needed for a fraudulent activity to occur.
- incentives
- pressure
- opportunity
But only one pillar is required for something to be considered to be fraud risk from an auditing perspective.
Explain CAS 240 and what it entails?
The auditor’s responsibilities relating to fraud in an audit of financial statements. Also provides guidance with identifying and assessing risks of material missatement due to fraud at both the OFSL and assertion level.
The objectives of the auditor are as follows:
- to identify and assess the risks of material misstatement of the financial statement due to fraud
- to obtain sufficient appropriate audit evidence regarding the assessment of risks of material misstatement due to fraud through designing and implementing appropriate responses
- to respond appropriately to fraud or suspected fraud identified during the audit.
Professional skepticism
The auditor must adopt an attitude of professional skepticism at all times. This requires the auditor to maintain a questioning mind, to be altert to conditions that may indicate possible misstatements due to error or fraud, and to critically assess audit evidence obtained.
Discussions with the engagement team
Discussions should be held regularly to discuss the susceptibility of the entity’s financial statement to potential fraud
What should a practitioner perform in hopes to prevent and detect fraud?
A practitioner should perform the following related to fraud detection:
- make inquiries of management regarding their identification, communication, and response to fraud risks
- make inquiries of both management and those charged with governance regarding actual, suspected, or alleged fraud in the company.
- making inquiries of those charged with governance as tho how they exercise oversight of management to identify and assess fraud risk
- look for unusual or expected relationships obtained from analytical procedures
- consider the risk of management bias and override
What are some procedures that the auditor should undertake in discharging their responsibilities related to fraud?
- Perform procedures to identify the risk of material misstatement due to fraud
- assess the risk of material misstatement due to fraud at the financial statement and assertion level
- determine the audit response to address risk of material misstatement
- evaluate audit evidence to consider whether an identified misstatement may indicate fraud has occurred
- obtain written representation from management in relation to fraud
- communicate with management, those charged with governance, and regulatory authorities
What is an appropriate response to reduce the risk of material misstatement at the OFSL level?
Responses include:
- assigning additional audit personnel with specialized knowledge and skills based on the fraud risk factors identified
- evaluating selected accounting policies and their application more carefully
- including an element of unpredictability in the audit procedures
- heightening the practitioner’s level of professional skepticism
Fraud risk at the assertion level is not pervasive and can be isolated back to a specific assertion for classes of transactions. Practitioner will need to design and perform additional audit procedures based on the risk of material misstatement
What is an appropriate audit response to identified or suspected fraud?
They need to re-evaluate the assessment of the risks of material misstatement due to fraud and how it affects the audit – and need to determined whether or not there is evidence of collusion. They need to communicate these matters on a timely basis to management to inform those with primary responsibility for the prevention and detection of fraud (CAS 260 - communication with those charged with governance)
