Fraud Risk

Question 1

2 types of fraud

Answer 1

1) fraud financial reporting (management level)
2) misappropriation of assets (employee level)

Question 2

Conditions that create environment for fraud

Answer 2

• inadequate corporate governance
• lack of tone at the top
• inadequate IC
• large financial incentives
• complex business operations
• high investor expectations

Question 3

Fraud triangle

Answer 3

1) Incentives and pressures (external pressures for business or personal)
2) Opportunity (override by management, or opportunity by lack of segregation)
3) Rationalization and attitude (steal because wages are frozen)
- more than one of the above needed for fraud to occur but only one needed to be considered a risk

Question 4

Auditor responsibilities related to fraud

Answer 4

• professional skepticism
• discussions with engagement team
• fraud detection (make inquiries)
• Fulfill responsibilities (perform, assess RMM, determine response, evaluate, obtain written representation from management, communicate)

Question 5

RMM due to fraud at OFSL

Answer 5

• Incentives/pressure (bonuses, sale of business, market competition, new users, limit tax)
• Opportunities (minimal owner involvement, inadequate management, weak controls, no internal audit, informal policies, management & ownership too trusting)
• Rationalization (aggressive culture, management relaxed attitude, management reduced bonus, avoiding job loss, attitude that controls not important

Question 6

RMM due to fraud at assertion level

Answer 6

• Incentives/pressures (valuable inventory that is highly liquids)
• Opportunities (no controls (no locks), no controls of purchases (no receipts), inventory not tracked in system, inventory is liquid)
• Rationalization (poor employee morale, management and ownership too trusting)

Question 7

Decreased fraud risk

Answer 7

• high controls (locks on inventory)
• high management oversight

Question 8

Audit response to fraud risk

Answer 8

• OFSL: assign additional personnel, evaluate carefully, include element of uncertainty, heighten professional skepticism
• AL: design and perform procedures based on specific risk

Question 9

Communication of fraud

Answer 9

• to management about employees
• to ownership about management