Fraud

Question 1

two types of fraud:

Answer 1

fraudulent financial reporting and misappropriation of assets.

Question 2

Management incentives to fraud

Answer 2

stock options and bonuses

pressured to show a positive financial performance because of the expectations of investors, creditors, or regulators.

Question 3

conditions that create an environment for fraud

Answer 3

• inadequate corporate governance
• lack of “tone at the top”
• inadequate internal control
• large financial incentives
• complex business operations
• high expectations by investors

Question 4

Fraud triangle

Answer 4

1. Incentives and pressures
2. Opportunity
3. Rationalization and attitude

Question 5

Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements

Answer 5

• to identify and assess the risks of material misstatement of the financial statements due to fraud
• to obtain sufficient appropriate audit evidence regarding the assessment of risks of material misstatement due to fraud through designing and implementing appropriate responses
• to respond appropriately to fraud or suspected fraud identified during the audit

Question 6

Requirements for the auditor regarding their responsibilities related to fraud.

Answer 6

Professional skepticism

Discussions with the engagement team

Fraud detection - inquiries, look for unusual or unexpected items, consider risk of mgmt bias and override

Fulfilling the auditor’s responsibilities related to fraud -
perform procedures
assess risk
determine audit response
evaluate audit evidence
obtain written mgmt representations
communicate with mgmt and those charged with governance

Question 7

Audit responses to fraud

Answer 7

• assigning additional audit personnel with specialized knowledge and skills based on the fraud risk factors identified
• evaluating selected accounting policies and their application more carefully
• including an element of unpredictability in the audit procedures
• heightening the practitioner’s level of professional skepticism