Fraud and Internal controls Flashcards
What is fraud in auditing?
An intentional act by one or more individuals to obtain an unjust or illegal advantage through deception.
What are the three types of fraud?
- Financial statement fraud
- asset misappropriation
- Corruption
What is the difference between fraud and error?
Fraud is intentional, error is unintentional
What are the three components of Cressey’s Fraud triangle?
- Rationalization
- Motivation/Pressure
- Opportunity
What conditions allow fraud to occur?
- Lack of internal controls
- Override of controls
- Lack of management
- Incompetent oversight
What is NZISA 240 about?
Auditors responsibilities relating to fraud in an audit of financial statements
Why is detecting fraud more difficult than detecting error?
Fraud involes intentional efforts to conceal it
What are the three objectives of Internal control systems (COSO)?
- Reliability of financial reporting
- Effectiveness and efficiency of operations
- Compliance with laws and regulations
What are the five components of internal control (COSO framework)?
- Control environment
- Risk assessment
- Control activities
- Information and communication
- Monitoring activities
What is the control environment?
The tone at the top - organisational culture, ethics and intergrity
What are control activities?
Policies and procedures that help ensure management directives are carried out (e.g. approvals, reconciliations, segregation of duties)
What is segregation of duties?
No one person should be responsible for authorising, recording and custody of assets.
What are the major duties that should be separated for internal control?
- Authorisation of transactions
- Custody of assets
- Recording/reporting of transactions
What are inherent limitations of internal control systems?
- Cost benefit trade off
- Human error
- Management override
- Collusion
- Controls may not adapt to system changes
What is the auditors responsibility regarding internal controls?
- To obtain an understanding of internal control relevant to the audit and assess the design and implementation of controls
