Detecting Fraud

Question 1

List the two types of financial statement—related frauds.

Answer 1

1. )Fraudulent financial reporting (sometimes called cooking the books)
2. )Misappropriation of assets (covering up theft by false journal entries)

Question 2

What definition of fraud is relevant to the auditor?

Answer 2

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements

Question 3

Identify the auditor’s responsibility for detecting fraud in a financial statement audit.

Answer 3

Auditors must:

1. )Design audit to provide reasonable assurance of detecting material misstatements whether due to fraud or error.
2. )Specifically assess the risk of material misstatement due to fraud.
3. )Document the assessment of the risk of material misstatement due to fraud and the resulting response(s) associated with any risk factors identified.

Question 4

What are the three categories of fraud-related risk factors that should be considered by the auditor?

Answer 4

1. )Incentives/Pressures (the motivation for committing fraud)
2. )Opportunities (the ability to commit fraud)
3. )Attitudes/Rationalizations (the justification or excuse for committing fraud)