Chapter 9 Fraud

Question 1

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

Answer 1

Fraud

Question 2

type of fraud in which an employee takes assets from an organization for personal gain. categorized as (1) corruption and (2) asset misappropriation

Answer 2

Defalcation

Question 3

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

Answer 3

Corruption

Question 4

occurs when a perpetrator steals or misuses an organization’s assets. dominant fraud scheme against small businesses.

Answer 4

Asset Misappropriation

Question 5

stealing cash after it has been recorded

Answer 5

Cash Larceny

Question 6

intercepting and taking cash before it is recorded on the books

Answer 6

Skimming

Question 7

funds disbursed fraudulently to an entity that is controlled by the fraud perpetrator

Answer 7

Fraudulent disbursements

Question 8

setting up false vendors and paying the vendors for fictitious goods

Answer 8

Billing Schemes

Question 9

putting fictitious employees on payroll

Answer 9

Payroll schemes

Question 10

overstating expense reimbursement requests

Answer 10

Expense reimbursement schemes

Question 11

altering checks; e.g., changing the payee or changing the payment amount

Answer 11

Check tampering

Question 12

intentional manipulation of reported financial results to misstate the economic picture of the firm

Answer 12

Financial Reporting Fraud

Question 13

reflects the public’s expectation that the auditor will use a proactive approach to fraud detection

Answer 13

SAS 99 audit standards

Question 14

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

Answer 14

Planning the Audit

Question 15

1. understand the nature of fraud
2. conduct brainstorming session to consider potential opportunities, motivation, and rationalization for fraud
3. obtain additional information that may be useful in identifying and assessing fraud risk
4. Identify the specific fraud risks
5. Evaluate the quality of company controls
6. Adjust audit procedures to assure that the audit adequately addresses the risk of fraud.
7. Gather and evaluate audit evidence
8. communicate the possibility that fraud exists to management
9. Determine the appropriate way in which to report any identified fraud
10. document the audit approach

Answer 15

Steps in using Professional Skepticism

Question 16

• 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

Answer 16

Fraud triangle

Question 17

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

Answer 17

Brainstorming

Question 18

1) internal control weaknesses

2) fraud risk factors

Answer 18

2 basic rules the auditor should follow in considering audit procedures

Question 19

1) discrepencies in the accounting records

2) auditor finds conflicting or missing evidential matter

Answer 19

2 issues present that heighten auditor skepticism

Question 20

reading corporate minutes, making inquiries of management and legal counsel, performing various tests of details to support specific transactions or balances

Answer 20

Detecting Illegal acts

Question 21

if fraudulent acts are discovered the auditor is encouraged to consult the client’s legal counsel

Answer 21

Reporting Illegal Acts

Question 22

extension of auditing that focuses on detailed investigation of situations where fraud has already been identified or where fraud is highly suspected

Answer 22

Forensic Accounting