Fraud Risk M1

Question 1

What are the concepts surrounding the three Audit Risk Factors?

Answer 1

• During planning, the audit team is required to discuss the potential for material misstatement due to fraud, and the fraud risk factors should be included in that discussion.

Question 2

Which factors would heighten an Auditors concern about the risk of fraud?

Answer 2

• An overly complex organization structure involving unusual lines of authority provides an opportunity for fraudulent financial reporting.
• If management faced excessive pressure to meet financial expectations would heighten auditor’s concern regarding fraudulent financial reporting.
• Large amounts of liquid assets that are easily convertible into cash would heighten an auditor’s concern about misappropriation of assets
• Nonfinancial management’s participation in the selection of accounting principles might heighten the auditor’s concern for financial reporting.

Question 3

What is the Auditor’s responsibility to report fraud?

Answer 3

• Do not disclose to outside parties
• Only fraud that causes a material misstatement of the financial statements or fraud involving senior management should be reported to those charged with governance.
• Only in certain limited circumstances would fraud be disclosed to the SEC via required regulatory reports.

Question 4

How should the Auditor respond to managers response to missing evidence?

Answer 4

The auditor should reevaluate the risk of fraud and design alternate tests.

Question 5

What are the four attributes used to identify Risk of Material Misstatements as a result of fraud?

Answer 5

1. Pervasiveness of the risk; Does the risk affect the financials as a whole, specific transactions, accounts, or assertions.
2. Type of risk; Misappropriation of assets or fraudulent reporting?
3. Significance of the risk; Can the risk lead to a material misstatement?
4. Likelihood of risk

Question 6

Who else outside of the client management and governance does the auditor have a duty to disclose acts of fraud to?

Answer 6

1. The SEC when the client reports an auditor change.
2. A successor auditor when the successor makes appropriate inquiries.
3. A government funding agency from which the client receives financial assistance