Consideration of Fraud, Error and Non-compliance

Question 1

What is an Error

Answer 1

Refers to an unintentional misstatement in financial statements including omission of an amount or a disclosure

Question 2

What is Fraud

Answer 2

Intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage

Question 3

What is Fraud

Answer 3

Intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage

Question 4

What do you call the person committing the fraud

Answer 4

Fraudster

Question 5

Fraudulent Financial Reporting

Answer 5

Involves intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users

Question 6

Misappropriation of Assets

Answer 6

Involving the theft of an entity’s assets

Question 7

Examples of Fraudulent Financial Reporting

Answer 7

1. Window Dresing- make the company look better than what it really is. (understatement of liability and expenses or overstatement of revenue and assets)
2. Secret Reserves- make the company look worse than what it truly is. (overstatement of liability and expenses or understatement of revenue and assets)

Question 8

Management

Answer 8

Personnel who are responsible to perform day to day functions of the business, internal controls and for making financial statements

Question 9

Those Charged with Governance

Answer 9

Personnel who will supervise the performance of management and are responsible for approving financial statements

Question 10

Responsibilities of Auditor in detecting fraud

Answer 10

1. Identify and assess the risk of material misstatement of the financial statements due to fraud
2. Obtain sufficient appropriate audit evidence about the assessed risk of material misstatement due to fraud, through designing and implementing appropriate responses
3. To respond appropriately to identified or suspected

Question 11

FInherent Limitations of an audit in the context of fraud

Answer 11

1. Unavoidable risk that will exist (audit risk)
2. Risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement
3. The risk of auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud
4. The subsequent discovery of material misstatement does not indicate a failure to comply with PSA

Question 12

Fraud Brainstorming

Answer 12

Exchanging of ideas among team members about how and where the financial statements might be susceptible to fraud

Question 13

Fraud Discussion

Answer 13

Emphasizing the importance of maintaining the proper state of mind regarding the potential for material misstatement due to fraud

Question 14

Fraud Risk Factors

Answer 14

Events or conditions that indicate an incentive or pressure to commit fraud, or provide an opportunity to commit fraud.

Question 15

Risk Assessment Procedures and Related Activities

Answer 15

1. Obtain an understanding of the entity and its environment
2. Identify and assess the risk of material misstatement due to fraud

Question 16

What needs to be documented in the auditor’s understanding of the entity and its environment and the auditor’s assessment of the risks of material misstatements

Answer 16

1. Significant decisions reached during the discussion among the engagement team regarding the susceptibility of entity’s financial statements to material misstatements due to fraud
2. The identified and assessed risk of material misstatement due to fraud at the financial statement level and at the assertion level

Question 17

What is Non Compliance

Answer 17

Refers to acts of omission or commission by the entity either intentional or unintentional which are contrary to the prevailing laws or regulations.

Question 18

Categories of Laws and Regulations