Fraud And Compliance

Question 1

Difference between fraud and error

Answer 1

Error: A simple unintentional mathematical or clerical mistake in the financial statements.

Fraud: Intentional act involving the use of deception to obtain an unjust or illegal advantage.

Question 2

Examples that increase fraud or error

Answer 2

Lack of segregation of duties

Understaffed accounting departments

Inadequate working capital

Significant transactions with related parties

Volatile business departments

Poor controls

Culture

Question 3

Types Of Fraud(Just Read)

Question 4

Fraud Triangle(Read)

Question 5

Responsibilities for prevention and detection of Fraud and Error

Answer 5

• Code of business conduct
• Culture of honesty and integrity
• Ethics Program
• Strong HR disciplinary procedures
• E-banking for payroll and other recurring outgoings
• Appropriate control environment
• Internal audit function, audit committee and an independent compliance function
• Action in action in response to actual, suspected or alleged fraud
• Whistle blower charter

Question 6

Responsibility of Auditor

Answer 6

• Provide reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error.
• Unavoidable risk some material misstatements may go undetected.
• Auditor must obtain sufficient evidence to support his opinion of true and fair representation of the financial statements.

Question 7

Discussion among the Audit

engagement team

Answer 7

• Required ISA 240 all members of team discuss susceptibility of entity’s financial
statements to material statement due to fraud.
• How management could perpetrate and conceal fraudulent financial reporting, and how
assets of the entity could be misappropriated
• Circumstances that my indicate earnings management and the practices that might be
followed by management to manage earnings leading to fraudulent financial reporting.
• External and internal factors, culture, opportunity etc
• Management involvement in overseeing employees with access to cash or other assets
• Unusual or unexplained changes in behaviour or lifestyle of
management or employees coming to attention of audit team
• Importance of professional scepticism and a proper state of mind
• Circumstances indicting possibility of fraud, risk of management
override of controls

Question 8

Limitations of Audit

Answer 8

• Judgement – setting materiality, number of items to test, assessing risk etc
• Accounting and internal controls – existence of non routine transactions, possibility of
human error, possibility of collusion, possibility of management override of controls,
omission of some controls due to cost, need to estimate
• The audit report has a prescribed standard format, that may be limiting, use of
auditing jargon, difficult to understand
• Sampling Risk – not all items are tested, sample tested and extrapolates result, some
misstatements may go unnoticed
• Timing of audit report – months after balance sheet date, even with a
Modified opinion, it may be too late
• Audit evidence – persuasive but not conclusive, attempts to collect
sufficient to support balances and transactions in the financial
statements.