Fraud Flashcards
What is fraud?
Is an intentional act by one or more individuals.
Involves the use of deception that results in a misstatement of the financial statements.
What are the types of fraud?
Fraud can be categorized as either fraudulent financial reporting, misappropriation of assets, or corruption.
Explain fraudulent financial reporting?
Fraudulent financial reporting involves intentional misstatements or omissions of amounts or disclosures in the financial statements that are designed to deceive FS users.
Explain misappropriation of assets?
Misappropriation of assets, or defalcation, involves theft of an entity’s assets when the effect of the theft causes the FS not to be presented in conformity with GAAP.
What are the fraud risk factors that are present when a fraud occurs?
- Incentives/pressure: a reason to commit the fraud
- Opportunity: a lack of effective controls
- Rationalization/ Attitude: an attempt to justify fraudulent behavior.
These conditions are referred to as “fraud risk factors”.
What is management’s responsibility in regards to fraud during an audit?
It is management’s responsibility to design and implement programs and controls to prevent, deter, and detect fraud.
What is the auditor’s responsibility in regards to fraud during an audit?
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the FS are free of material misstatements whether caused by error or fraud.
The fraud risk assessment is an ongoing process and should be considered in every stage of the audit.
What fraud related procedures should an auditor perform during an audit?
- discuss fraud risk with engagement personnel
- obtain information to identify specific fraud risks
- assess fraud risk and develop an appropriate response
- evaluate audit evidence regarding fraud
- make appropriate communications about fraud
- document the auditor’s consideration of fraud
Who should the auditor talk to in order to obtain information regarding the client’s view on fraud?
Auditor should direct inquires to management, employees involved in financial reporting, operating personnel, internal auditors, in house legal counsel, and those in charge with governance.
Inconsistent responses or responses that are otherwise unsatisfactory indicate a need for additional evidence.
How does analytical procedures help in detecting fraud risk?
analytical procedures may provide only a board indication regarding fraud risk.
What does size, complexity, and ownership characteristics of the entity have to do with fraud risk?
Large entities may have an audit committee, an internal audit function, or a formal code of conduct, all of which may help to deter fraud.
Smaller entities may lack such features, however, they sill can exhibit a strong culture that discourages fraud.
What can be done to assess the risk of management override of controls?
Look for evidence of material misstatement due to fraud by:
- Examining journal entries and other adjustments
- Reviewing accounting estimates for biases (retrospective approach: compare prior period estimates to actual subsequent events)
- Evaluating the business purpose for significant unusual transactions.
What type of opinion should an auditor issue when there is a significant risk of material misstatements due to fraud?
The auditor should not issue an opinion and instead should withdraw.
What are misstatements due to fraud indicative of and what are the related implications?
misstatements due to fraud, whether material or immaterial, are indicative of a problems with management integrity.
Auditor should reevaluate their assessment of fraud risk, effectiveness of controls, and the appropriateness of audit procedures applied.
Fraud related communications should be directed to whom?
should be discuss with an appropriate level of management at least one level above those involved.
