Chapter 3 Flashcards
two types of misstatements caused by fraud
misstatements resulting from fraudulent activities ( window dressing)
misstatements resulting from misappropriation of assets
who’s responsibility is the prevention of fraud
management
what is the auditors responsibility in respect to fraud
the auditors must obtain reasonable assurance that the FS are free from material misstatement
what are the specific objectives to achieve assurance on the FS being free from material misstatement
identify and assess risk of material misstatement due to fraud
obtain sufficient appropriate evidence
respond appropriately to fraud or suspected fraud
3 conditions that lead to fraud
an incentive or pressure to commit fraud ( motive)
a perceived opportunity to commit fraud ( opportunity)
an ability or attitude to rationalise the fraudulent action ( dishonesty)
what is the procedure for discovering misstatements
auditor must obtain written representation that mngment accept responsibility for the prevention and detection of fraud and disclosed all relevant info to auditors
what else must audit document when discovering misstatements
significant decisions reached as a result of the teams discussion of fraud
identified risk of misstatement
overall response to assessed risk
results of specific audit tests
any communication with management
what is the effect on the audit report of insufficient or inappropriate audit evidence
qualified or disclaimer of opinion
what is the effect on the audit report of uncorrected fraud leading to material misstatement
qualified or adverse opinion
in order for a client to successfully sue an auditor, they must prove negligence from the auditors. what are the 4 things they must prove
a duty of care exists
the duty of care was breached
the breach caused the injured party a loss
the harm was not too remote
example of a third party and how they can sue auditors
if the auditors were aware of a relationship with their client and a third party then the third party can claim a duty of care exists as its assumed ( as they have no contract with the auditors )
what is professional indemnity insurance (PII)
insurance against civil claims made by clients and third parties
what is fidelity guarantee insurance
insurance against liability arising through any acts of fraud or dishonesty from a partner, director or employee, in respect of any money or goods held in trust by a firm
what is the expectation gap
the difference between the expectations of those who rely upon auditors reports concerning audit work performed and the actual work performed
general misunderstandings the public have about audit
its the auditors duty to detect and prevent fraud
the auditor is liable for any errors in the FS
