Chapter 11: Fraud Auditing Flashcards
An intentional misstatement or omission of amounts or disclosures with the intent to deceive users
Fraudulent Financial Reporting
Involves deliberate actions taken by management to meet earnings objectives
earnings management
A form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings
income smoothing
_________ of ________ involves theft of an entity’s assets. Employee stealing assets
misappropriation of assets
What are the three conditions for fraud?
incentives/pressures
opportunities
attitudes/rationalization
With regards to Fraudulent Financial Reporting, which one of the three aspects of the fraud triangle does this describe when looking into fraud risk factors?
a decline in earnings may threaten the company’s ability to obtain financing. Companies may also manipulate earnings to meet analysts’ forecasts or bench marks such as prior year earnings, to meet debt covenant restrictions, to achieve a bonus target based on earnings, or to artificially inflate stock prices
incentives/pressures
With regards to Fraudulent Financial Reporting, which one of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?
Although financial statements of all companies are potentially subject to manipulation, the risk is greater for companies in industries where significant judgments and estimates are involved. For example, valuation of inventories is subject to greater risk of misstatement for companies with diverse inventories in many locations. Another example is a turnover in accounting personnel or other deficiencies in accounting and information processes can create an opportunity for misstatement.
opportunities
With regards to Fraudulent Financial Reporting, which one of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?
If the CEO or other top managers display a significant disregard for the financial reporting process, such as consistently issuing overly optimistic forecasts, or they are overly concerned about meeting analysts’ earnings forecasts, fraudulent financial reporting is more likely.
Attitudes/rationalization
With regards to Misappropriation of assets, which of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?
Employees with excessive financial obligations, or those with drug abuse, or gambling problems, may steal to meet their personal needs. IN other cases, dissatisfied employees may steal from a sense of entitlement or as a form of attack against their employers.
incentives/pressures
With regards to Misappropriation of assets, which of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?
Weak internal controls
inadequate separation of duties
when employees have custody or temporary access to assets and maintain the accounting records for those assets
opportunities
With regards to Misappropriation of assets, which of the three aspects of the fraud triangle does this describe, when looking into fraud risk factors?
top management displays a significant disregard for controls and ethical conduct
attitudes/rationalization
In exercising __________ ____________, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty”
professional skepticism
What two things must you remember when practicing professional skepticism?
keep a questioning mind
critical evaluation of audit evidence
What 5 sources of information need to be gathered in order to assess fraud risks?
communication among audit teams inquiries of management risk factors analytical procedures other information
With regards to communication among audit teams, the audit team is required to brainstorm over?
1) how/when Financial statements might be susceptible to _______ ______ due to fraud?
2) how management could perpetrate and conceal
______ _______ ______
3) How assets could be __________
4) How the auditor might respond to the susceptibility of material misstatement due to fraud?
1) material misstatement
2) fraudulent financial reporting
3) misappropriated
With regards to inquiries of management, the auditor should be asking/ inquiring:
1) Does management have any __________ of fraud or suspected fraud within the company?
2) Inquire of audit committee about its views of the _____ of _____ and whether they have any knowledge of fraud or suspected fraud.
3) inquire of others in company
1) knowledge
2) risk of fraud
Which one of the sources of information gathered to assess fraud risk does this exemplify?
evaluate whether fraud risk factors exist that indicate incentives or pressures to perpetuate fraud, opportunities to carry out fraud, or attitudes or rationalizations used to justify a fraudulent action
risk factors
With regards to analytical procedures:
they are required to be performed in the ______ and _______ phases of the audit
the auditor is required to perform analytical procedures on _________ ________
planning and completion
revenue accounts
Which one of the sources of information gather to assess fraud risk does this exemplify?
auditors should consider all information they have obtained in any phase or part of the audit as they assess the risk of fraud.
other information
Auditing standards require that auditors document the following matters related to the auditor’s consideration of material misstatements due to fraud(part 1):
_______ among audit team
_______ performed to obtain information
specific _______ of fraud that were identified, and auditor’s response to those risks
Reasons supporting a ________ that there is not a significant risk of material improper revenue recognition
discussion
procedures
risks
conclusion
Auditing standards require that auditors document the following matters related to the auditor’s consideration of material misstatements due to fraud(part 2):
_______ of procedures performed to address the risk of management override of controls
other conditions and _________ relationships indicating that additional auditing procedures or other responses were required, and the actions taken by the auditor
Nature of communications about fraud to __________, the ________ ___________, or others
results
analytical
management, audit committee
Guidance developed by the AICPA identifies three elements to prevent, deter, and detect fraud
1) Culture of honesty and high _____
2) Management’s __________ to evaluate risks of fraud
3) ______ _______ oversight
ethics
responsibility
audit committee
To create a culture of honesty and high ethics these are things management must do:
1) ?
2) create a positive workplace environment
3) ____ and ______ the appropriate employees
4) proper ____
5) confirmation that employees confirm their responsibilities for complying with the code of conduct
6) Discipline
1) set the tone at the top
3) hire and promote
4) training
To evaluate fraud risk and implement programs and controls to mitigate identified fraud risks
1) _______ and ________ fraud risks
2) _______ fraud risks
3) _________ fraud prevention programs and controls
identify and measure
mitigate
monitor
To have proper audit committee oversight, the audit committee has primary responsibility to oversee financial reporting and _______ _______ process
internal control
How does the audit team respond to the risk of fraud?
1) Change the overall conduct of the audit to respond to identified ________ ________
2) ______ and ______ audit procedures to address identified risks
3) Design and perform procedures to address the risk of management override of _______
4) Update _______ _________ process
fraud risks
design and perform
controls
risk assessment
The 3 procedures that must be performed in every audit to address management override are to:
1) _________ journal entries and other financial statement adjustments for evidence of possible misstatements due to fraud (is there any entries at weird times)
2) Review accounting _______ for biases
3) Evaluate the business _______ for significant unusual transactions
1) examine
2) estimates
3) rationale
What are the specific fraud risks areas to be aware of: \_\_\_\_\_\_\_ and \_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_ inventory \_\_\_\_\_\_\_\_ and \_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_ fixed assets \_\_\_\_\_\_\_
revenue and accounts receivable
purchases and accounts payable
payroll
When fraud is suspected, the auditor gathers additional information to determine whether fraud actually exists, how does the auditor do this?
inquiries and observation
discuss the matter and audit approach for further investigation with an appropriate level of management, as well as senior management and audit committee
When fraud exists, there are implications for the auditor’s report on internal control over financial reporting. Fraud of an magnitude by senior management is at least a significant deficiency and may be a material weakness. If it is a material weakness, then the auditor would issue what kind of opinion on what part of the audit?
adverse on internal control over financial reporting
Ten truths you need to know about fraud:
1) Fraud is prevalent
2) ____ can commit fraud
3) why people commit fraud
4) the best deterent is to increase the perception of detection
5) Perpetrators are often ______ _______
2) anyone
5) trusted employees
Ten truths you need to know about fraud:
6) Fraud schemes are not unlimited in number
7) red flags are only warnings
8) Auditors can’t be relied upon to detect _____
9) Hotlines and fraud assessment questioning are useful techniques
10) ______ is superior to detection
fraud
prevention
