fraud

Question 1

Define fraud

Answer 1

deprivation by deceit – the intentional misstatement or misappropriation of assets by an individual or group of individuals

Question 2

Who does the responsibility for prevention and detection of fraud lie with?

Answer 2

Management and those charged with governance (the board)

Question 3

What are the two forms that fraud takes

Answer 3

1) removal of funds of assets
2) intentional misrepresentation of the financial position of the company

Question 4

Examples of fraud: removal of funds or assets

Answer 4

• Theft of cash or inventory
• Payroll fraud
• Teeming and lading
  –misallocation of recipts to a customer account to hide theft of earlier receipts
• Fictitious customers
• Collusion with customers/suppliers

Question 5

Examples of fraud: interntional misrepresentation of the financial position of a company

Answer 5

• Overvaluation of the inventory
• Not writing of irrecoverable debts
• Fictitious sales
• Manipulation of year end effects
• Understating expenses
• Manipulating depreciation

Question 6

What are circumstances under which fraud is likely to arise in a company

Answer 6

• Disreputable employees, lack of ethical leadership, poor cultural influences
• Lack of supervision or controls or security
• Poor rewards,
• Opportunities for collusion

Question 7

Why are external auditors concerned with fraud?

Answer 7

raud can cause misstatements in financial statements if it exists.

auditing standards require that they should be wary of fraud and maintain an attitude of professional scepticism throughout the audit

Question 8

Implication of fraud for the organisation

Answer 8

• Loss of assets, reputation, privacy, morale
• Paranoia
• Increase security costs and restriction of privileges

Question 8

How should the external auditor approach fraud

Answer 8

the EA should consider areas in which the financial statements might be susceptible to material misstatement due to fraud, including how frauds might occur and be alert for evidence that it may be taking place

Question 9

What would an external auditor do if they detect a fraud and the matter is in the public interest

Answer 9

Auditor could consider breaching their duty of client confidentiality by reporting the matter to the relevant authority.
Take legal advice first - v serious matter

Question 10

What would an external auditor do if they detect a fraud

Answer 10

extend their testing on that area and then determine the need to modify the audit report

The auditor must also make appropriate reports to:

1) Audit Commitee

2) Shareholders

Question 11

What would an external auditor do if they detect a fraud that results in money laundering

Answer 11

to avoid prosecution for ‘failing to report’
- accountant must report to the firm’s MLRO who will make a report to the National crime agency if needed

Question 12

List of control activities that help the company prevent fraud

Answer 12

1) Authorisation
2) Physical controls
3) Segregation of duties
4) Information processing
5) Documenting

Question 12

What is the main method for ensuring neither fraud nor errors occurs?

Answer 12

by having sound internal control system

Question 13

Control activities: Authorisation

Answer 13

approval of transactions by a suitably responsible official

Question 13

Control activities: Physical controls

Answer 13

restricting access to physical assets such as cash or inventory and accounting records

Question 14

Control activities: Segregation of duties

Answer 14

assignment of roles/responsibilities within a process to diff people

Question 15

Control activities: Information processing

Answer 15

arithmetic and accounting controls such as checking the arithmetical accuracy of accounting records or performing account reconciliation

Question 16

Control activities: Documenting

Answer 16

what procedures should be followed and whether they have been followed

Question 17

How to detect whether fraud in the accounting system has occured

Answer 17

Test controls
Carry out substantiative procedures

Question 18

What are test controls

Answer 18

conduct spot checks to identift the effective implementation of control activities

Question 19

How do you carry out substantiative procedures

Answer 19

• conduct Performance reviews and compare budget vs actual results
• Compare info produced by accounting system with external evidence, such as bank statements and supplier statements
• Prepare control accounts where transations are recorded in individual accounts and in total
• Reconcile information in the accounting system with external evidence and other internal information

Question 20

What is a fraud response plan

Answer 20

Sets out a plan of action in case of suspected cases of fraud, theft or corruption

Having a plan may in itself act as a deterraent

Question 21

What are the roles and duties of individual managers in the fraud detection and prevention process

Answer 21

• Vigilance
• Collective responsibility
• Communications to staff
• Risk assessment
• Cost-benefit analysis
• Culture
• Implement system of strong controls
• Arrange regular audit of controls
• Adopt zero tolerance approach to fraud

Question 22

Who is the approach to fraud overseen by

Answer 22

e audit comittee as part of their wider duty of risk and internal controls