Chapter 5 Flashcards
Name the 5 types of Audits.
Tax, Operational, Compliance, Financial Statement, Fraud
What are the kinds of taxes scrutinized in a tax audit?
Sales Tax (Harmonized sales tax), Payroll tax, Income Tax (Temporary Differences vs. Permanent Differences)
Define Internal auditing
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.
Name 4 reasons for a company to have internal auditing.
- Effective and efficient operations 2.Reliability and integrity of financial and operational information 3.Safeguarding of assets 4. Compliance with Laws Regulations and contracts
Name 7 reasons for a company to have external auditing.
- Companies prepare information to be used by financial decision makers. 2. To obtain loans or to sell stock. 3. This is a potential conflict of interest. 4. Users are naturally skeptical of the financial information. 5. External Auditors make the information more credible. 6. Verification reduces the risk the information is misleading. 7. Without effective audits, capital resources cannot efficiently be allocated to economic entities.
What do external auditors do to the financial information?
Make it more credible
Go through the steps of the Accounting Process.
Analyse events and transactions –> Measure and Record transaction data –> Classify and summarise recorded data –> Prepare the financial statements and other reports in accordance with the identified financial reporting framework
Go through the steps of the Auditing Process.
Obtain and evaluate evidence concerning the financial report –> Verify that financial informationhas been presented fairly in accordance with an identified finacial reporting framework –> Express an opinion in the audit report –> deliver the audit report to entity
What happens at the end of both the accounting and the auditing process?
Distribute the annual report (both accounting statement and audit reports) to shareholders
What 3 points describe the role of the auditor?
- Auditing does not include financial report production 2. To determine whether the informaion in the finacial statements is reliable and they communicate this to the users 3. Audting in financial reporting is a process of reducing information risk
Do Auditors report on BUSINESS RISK?
NO AUDITORS DO NOT REPORT ON BUSINESS RISK
What is business risk and what 4 factors influence it.
Business risk is the risk that a company may fail to achieve its objectives due to: economic changes, technology changes, poor management decisions, bad luck
What is information risk?
The risk that the financial information fails to reflect economic substance of bsuiness activities AKA the risk of financial information being unreliable
What are two major categories of information risk? (Define them as well)
AUDIT RISK: the risk of insufficient evidence being brought forward to the auditor, leading to inappropriate audit opinion. ACCOUNTING RISK: The risk that errors associated with estimates used in GAAP accounting are not properly disclosed
What are three risks within Audit Risk?
Inherent Risk, Control Risk, Detection Risk
Define Inherent Risk
The probability that a material misstatement will occur in the financial statements
Define Control Risk
Material Misstatements will not be prevented or detected by internal controls
Detection Risk
Material Misstatements will not be detected by the auditor
What is the equation for Audit Risk?
AR = IR x CR x DR
What is the general standard of the Canadian Audit Standards?
Competence, Due Care and Objectivity
What is ‘Due Care’ under the context of the Canadian Audit Standards?
This means the audit was done in a way that would be considered fair by another professional
What are the 3 examination standards for audits under CAS?
- Planning and Supervision 2. Need to understand the system of Internal Controls 3. The auditor is explicitly required to design procedures to detect fraud
Define the Canadian Audit Standards.
Practice standards are general guides for the quality of professional work
When does an audit fail?
If there is not sufficient, appropriate audit evidence to support the report opinion.
What is the overall objective of a financial audit statement?
The overall objective of a financial statement audit is to enable the auditor to express an opinion as to whether the financial statements are prepared, in all material aspects, in conformity with an applicable framework, usually GAAP.
What is Fraud?
A deliberate deception practiced so as to secure unfair or unlawful gain
What is Occupational Fraud and Abuse?
The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.
What are the 4 aspects of corruption?
- Conflicts of Interest 2. Bribery 3. Illegal gratuities 4. Economic Extortion
What are the 2 types of Asset Misappropriations?
- Cash 2. Inventory and other assets
What are the two types of Fraudulent Statements?
Financial and Non-Financial
Name the 4 elements of Fraud
- A Material false statement 2. Knowledge that the statement was false 3. Reliance on the false statement by the victim 4. Damages resulting from the victim’s reliance on the false statement
What is Larceny?
Someone is stealing
What is Conversion?
Altering the condition of company assets
What is Embezzlement?
People who had lawful access to company assets but then stole them
What is a Breach of Fiduciary Duty?
Breaking a position of trust and not acting in the best interest of who you represent
What is Abuse?
Using company assets unfairly: calling in sick when not sick
What are some fraud-related finacial crimes.
Larceny, conversion, embezzlement, breach of fiduciary duty and abuse
Describe forensic accounting.
Forensic accounting utilizes accounting, auditing, and investigative skills to conduct an examination into a company’s financial statements. Thus providing an accounting analysis that is suitable for court.
Describe fraud examination.
Resolving allegations of fraud from tips, complaints or accounting clues
What are the 5 clues used in fraud examination?
Documentary evidence, Interviewing witnesses, writing investigative reports, testifying, assisting in the detection and prevention of fraud
What are the Auditing vs. Fraud Examination measuring factors? Show how they differ on each.
- Timing (A: Recurring, F: Nonrecurring) 2. Scope (A: General, F: Specific) 3. Objective (A:Opinion, F: Affix Blame) 4.Relationship (A:Nonadversarial, F:Adversarial) 5.Methodology (A:Audit techniques, F: Fraud examination techniques) 6. Presumption (A: Professional skepticism, F: Proof)
What are the 4 steps in the fraud theory approach?
- Analyze Data 2. Create a hypothesis 3.Test the Hypothesis 4. Refine and amend the hypothesis
List the observational tools used in Fraud Examination (do so in the correct order: from first used to last).
Document Analysis –> Neutral Third-Party Witnesses –> Corroborative Witnesses –> Co-conspirators –> Target
What occurs between the step from one observational tool to another? Define it.
Predication: the totality of circumstances that would lead a reasonable, professionally trained and prudent individual to believe a fraud has occurred, is occuring or will occur.
What are 4 prominent names in occupational fraud and abuse?
- Edwin H. Sutherland 2. Donald R. Cressey 3. Dr. Steve Albrecht 4. Richard C. Hollinger and John P. Clark
What is Edwin H. Sutherland do?
In 1939 he first defined “white-collar crime”, criminal acts of corporations and individuals in corporate capacity. Theory of differential association
What is differential association?
Crime is learned, not genetic, learned from intimate personal groups.
What is the Fraud Triangle? Who created it?
Donald Cressey, The fraud triangle encompasses three things that must exist to commit fraud: PRESSURE, OPPORTUNITY, RATIONALIZATION
Describe the 6 elements that exist under the pressure portion of the Fraud Triangle.
- Violation of ascribed obligations 2. Personal Failures 3. Business reversals 4. Physical Isolation 5. Status Gaining 6. Employer-employee relations
Describe the 2 elements that exist under the Percieved Opportunity portion of the Fraud Triangle.
- General Information (knowledge that the employee’s position of trust could be violated) 2. Technocal Skill (Ability to commit violation –> usually the same ability that employee needs to obtain job in the first place)
Describe the 5 elements of rationalization that exist under the rationalization portion of the fraud triangle.
- They owe me 2. Borrowing 3. Nobody will be harmed 4. I deserve more 5. It’s for a good purpose
Cressey’s Offender Types?
- Independent Businessmen (‘Borrowing’ OR funds really theirs) 2. Long-Term Violators (‘Borrowing’ OR Protect Family OR Company Cheating them OR Company Generally Dishonest) 3. Absconders (Take the money and run OR Usually loners OR Blame ‘outside influences’ or ‘personal defects’
What did Dr. Steve Albrecht do?
Created a list of 50 possible indicators of occupational fraud and abuse, Developed the Fraud Scale, Assembled a list of pressure opportunity and integrity variables
What were the two principle categories that variables fell under on Dr. Steve Albrecht’s List?
Perpetrator characteristics OR Organizational Environment
What are the three elements of the fraud scale by Dr. Steve Albrecht?
Situational Pressures, Percieved Opportunities and Personal Integrity
What were the findings of the Hollinger-Clark Study?
It was looking at theft caused by job dissatisfaction and it found the the true costs are vastly understated.
What were the conclusion of the Hollinger study?
- Employee perception of controls is critical 2. Increased security may hurt not help 3. Employee-theives exhibit other deviance (sloppy work, sick leave abuses, etc.) 4. Management should be sensitive to employees 5. Pay special attention to young employees
