Chapter 13: The CPA's Responsibility for Fraud Flashcards
What is the CPA’s main responsibility for designing an audit?
must have a reasonable chance of detecting all material misstatements
What are the main causes of misstatements?
1) Unintentional errors in application, 2) Misunderstanding of instructions, 3) Intentional theft of assets, 4) Fraudulent financial reporting
What is the difference between error and fraud?
intention
Why would management wish to manipulate the F/S?
related to pressures on management to meet certain performance goals
What is the fraud triangle?
Motive, Perceived opportunity, and Ability to rationalize
What is motive?
reason for wanting to commit the fraud
What is perceived opportunity?
believes he can commit the fraud and not get caught
What is the ability to rationalize?
able to convince himself that the act is not really bad
What is the fraud triangle used for?
to identify high risk areas
When is the risk of fraud deemed high?
whenever all three legs of the triangle are present
Why was SAS 99 issued?
to provide guidance to auditors on their responsibility for fraud and how to detect fraud in F/S audits
What procedures does SAS 99 recommend be incorporated into the audit plan?
1) Discuss the risk of fraud with the engagement personnel, 2) Reinforce the need for professional skepticism, 3) Identify high-risk fraud areas, 4) Plan audit testing strategy to address high-fraud risk areas
What does it mean to discuss the risk of fraud with the engagement personnel?
the audit team should meet prior to commencing the audit to discuss fraud and the need for skepticism during the audit
What does it mean to reinforce the need for professional skepticism?
auditors should maintain professional skepticism, important to start with healthy state of skepticism and periodically restore that state throughout the audit as skepticism wanes
What is professional skepticism?
auditors’ attitude or state of mind as he conducts the audit and reviews evidence
