Fraud & Illegal Acts Flashcards
What are two types of fraud?
- Misappropriation of assets
2. Fraudulent financial reporting
According to research studies, which accounts are most likely to be misstated through fraud?
Revenue and inventory
Who is most likely to commit financial statement fraud?
The CEO and/or CFO (with collusion).
What model do auditors use to assess the risk of financial statement fraud?
Prob(fraud) = f(motive, opportunity,rationalization)
What red flags indicate management may have a motive to commit fraud?
Financing needs. Employee stock options. Compensation tied to financial performance. Operating losses. Contractual commitments.
What red flags indicate management may have the opportunity to commit fraud?
Weak board of directors. Weak internal controls. Related party transactions. Accounts requiring estimates/judgment. Dominated decisions.
What red flags might cast doubt on management’s integrity?
Lies or evasiveness. Aggressive accounting policies. History of unethical behavior. Poor reputation. Pressure on auditor.
How should an auditor respond if s/he concludes there is a high risk of fraud?
Assign more experienced personnel.
Conduct more extensive testing (larger sample sizes).
Seek evidence from independence sources.
Conduct audit with heightened skepticism.
Vary audit procedures from prior year.
What fraud-related procedures does SAS No. 99 require auditors to perform during the planning stage of the audit?
Conduct a brain-storm session.
Interview employees about procedures to deter and detect fraud.
Perform analytical procedures.
What fraud-related procedures does SAS No. 99 require auditors to perform during the fieldwork stage of the audit?
Conduct specific procedures for revenue, inventory, and accounting estimates.
Review material journal entries.
Vary audit procedures from year to year.
What are the auditor’s reporting responsibilities if s/he discovers fraud during an audit?
Report the fraud to senior management and the board of directors. Generally, no responsibility to report the fraud to outsiders.
Under what circumstances might an auditor report report fraud to a third party?
When responding to an 8K.
When responding to an inquiry from a successor auditor.
When subpoenaed.
When required by a governmental regulatory or funding agency.
When required by the Securities Litigation reform Act of 1995.
What types of illegal acts does the auditor have the highest responsibility for detecting?
Illegal acts that have a direct and material effect on the financial statements.
