Ch.7 Fraud Flashcards
What are two types of Fraud?
1) Fraudulent financial reporting
2) misappropriation of assets
What is fraudulent financial reporting?
Occurs at the management level - through intentional omissions or manipulation of amounts or disclosures with the intention of deceiving users and stakeholders.
- done to manage earnings or influence user perception
What is the misappropriation of assets?
This is done at the employee level in relatively small amounts - could be embezzlement, theft of small assets, theft of intellectual property, unauthorized personal purchases, and the use of company assets for personal use.
What are characteristics of fraud?
inadequate corporate governance
lack of the tone at the top
inadequate internal controls
large financial incentives
complex business operations
high expectations by investors
What is the fraud triangle?
Rationalization
Pressure
Opportunity
What are the auditors responsibilities relating to fraud in an audit of finanical statements (CAS 240.11)
- to identify and assess the risk of material misstatement of the finanical statements due to fraud
- to obtain sufficient appropriate audit evidence regarding the assessment of risks of material misstatement due to fraud through desigining and implementing appropriate responses
- to respond appropriately to fraud or suspected fraud identified during the audit
What are some common items that an auditor to do to address fraud?
Professional skpticism
Discussions with engagement team
Fraud detection (make inquireies)
Fulfilling the auditor’s responsibilities related to fraud
What are some OFSL level risks involving pressure
bonuses and performance incentives based on net income or share price
slae of the business with price based on financial performance
increasecd market competition
additional users (such as current/potential investors or financers)
tax minimization
debt covenants based on net income or equity
What are some OFSL level risks involving opportunity
Minimal shareholder/owner involvement
inadequate management and/or overight of processes and acitvities within the environment
weak control environment
no internal audit function
information policieis and processes
management too trusting of employees
onwership too trusting of management
What are some OFSL level risks involving rationalizaton/attitude
Aggresive culture (taking additional risks)
Management has a relaxed attitude toward fraud
ownership has a relaxex attitude to fraud
manamange reduced employee bonuses
avoiding job lossess associated with poor performace or insolvency
ownership/management attitude is that contorls are not as imporant
What are some assertion level risks with pressure?
inventor ythat is valuable can be converted into cahs easily
What are some assertion level risks with opporunities?
inadequate controls safeguarding inventory
weak controls over the purcahsing of inventory
outdated inventory management tracking system
inventory is portable (easy to steal) and liquid (easy to convert)
What are some assertion level risks with rationalization?
poor employee morale
management too trusting of employees, in realtion to specific accounts (such as having a realxed attitude toward discrepancies noted)
ownership to otrsuting of management, in relation to specific accounts
What is an appropriate audit response to fraud risk?
including an element of unpredictiability in audit procedures
heightened professional skepticism
assigning additional audit personnel
evaluating selected accounting policies and their application more carefully
Audit response to identified or susepcted fraud?
Auditor needs to communicate this to management to inform those with the primary responsibility for the prevention and detection of fraud of matters related to their responsibilities
if manaagement or sigifncaitn employees are suspected, the auditor shall communicate this to the board of directors or otehrs charged with governance on a timely basis
Auditors can alsoo report the occurance to a third party - although an auditor’s duity is to maintain confidentiality, auditor’s also have a legal responsbility and may override the duty of confidenetiality
