Fraud, laws and regulations

Question 1

What are the two types of fraud which may cause material misstatement in the financial statements?

Answer 1

1. Fraudulent financial reporting - intentional misstatements, including omissions of amounts or disclosures in financial statements, to deceive financial statement users
2. Misappropriation of assets - the theft of entity’s assets

Question 2

What risk assessment procedures should be followed to identify the risk of material misstatement due to fraud?

Answer 2

1. Enquiries to management:
   - management’s assessment on the financial statements re risk of fraud
   - management’s process for identifying fraud
   - management’s communication to those charged with governance
   - management’s knowledge of actual or suspected fraud
2. Enquires to internal audit for any knowledge of fraud
3. Obtain an understanding of how those charged with governance oversee management’s processes
4. Enquires to those charged with governance
5. Evaluate unusual relationships using analytical procedures
6. Consider any other information
7. Evaluate whether any fraud risk factors are present