Chapter 9 Fraud Flashcards
involves either intentional embezzlements or thefts of funds from a company or the intentional misstatement of financial statements in order to achieve a perception that a company is doing better than it is actually doing
Fraud
type of fraud in which an employee takes assets from an organization for personal gain. categorized as (1) corruption and (2) asset misappropriation
Defalcation
occurs when fraudsters wrongrully use their influence in a business transaction in order to procure some benefit for themselves or another person, contrary to their duty to their employer or the rights of another. Most common example is a Kickback
Corruption
occurs when a perpetrator steals or misuses an organization’s assets. dominant fraud scheme against small businesses.
Asset Misappropriation
stealing cash after it has been recorded
Cash Larceny
intercepting and taking cash before it is recorded on the books
Skimming
funds disbursed fraudulently to an entity that is controlled by the fraud perpetrator
Fraudulent disbursements
setting up false vendors and paying the vendors for fictitious goods
Billing Schemes
putting fictitious employees on payroll
Payroll schemes
overstating expense reimbursement requests
Expense reimbursement schemes
altering checks; e.g., changing the payee or changing the payment amount
Check tampering
intentional manipulation of reported financial results to misstate the economic picture of the firm
Financial Reporting Fraud
reflects the public’s expectation that the auditor will use a proactive approach to fraud detection
SAS 99 audit standards
considering the risk of fraud, the auditor must:
- Understand the business and the risks it faces
- Understand changes in the economy and how changes in the economy might affect the business
- Understand potential management motivation to perpetrate a fraud
- Identify opportunities for other employees to conduct a defalcation
- Analyze current changes in the company’s financial results to determine if the results look reasonable
- Identify areas that might be indicative of fraud, or of the potential for fraud
Planning the Audit
- understand the nature of fraud
- conduct brainstorming session to consider potential opportunities, motivation, and rationalization for fraud
- obtain additional information that may be useful in identifying and assessing fraud risk
- Identify the specific fraud risks
- Evaluate the quality of company controls
- Adjust audit procedures to assure that the audit adequately addresses the risk of fraud.
- Gather and evaluate audit evidence
- communicate the possibility that fraud exists to management
- Determine the appropriate way in which to report any identified fraud
- document the audit approach
Steps in using Professional Skepticism
- incentive, or pressure, to commit fraud
- Opportunity to commit and cover up the fraud
- Rationalization- the mindset of the fraudster to justify committing the fraud
Fraud triangle
required by SAS 99 to consider the manner in which fraud might be committed. SAS 99 recommendations include:
- consider how fraud can be perpetrated and covered up
- presume fraud in revenue recognition
- consider the fraud triangle
- consider industry conditions
- consider operating characteristics and financial stability
Brainstorming
1) internal control weaknesses
2) fraud risk factors
2 basic rules the auditor should follow in considering audit procedures
1) discrepencies in the accounting records
2) auditor finds conflicting or missing evidential matter
2 issues present that heighten auditor skepticism
reading corporate minutes, making inquiries of management and legal counsel, performing various tests of details to support specific transactions or balances
Detecting Illegal acts
if fraudulent acts are discovered the auditor is encouraged to consult the client’s legal counsel
Reporting Illegal Acts
extension of auditing that focuses on detailed investigation of situations where fraud has already been identified or where fraud is highly suspected
Forensic Accounting
