l8 : fraud & auditing the income statement

Question 1

what is fraud?

Answer 1

the intentional act by one or more individuals involving the use of deception to obtain an unjust or illegal advantage

Question 2

what are the two types of fraud?

Answer 2

• misappropriation of assets
• fraudulent financial reporting

Question 3

what is misappropriation of assets as a type of fraud?

Answer 3

theft of assets (cash, stock, fixed assets)

Question 4

what is fraudulent financial reporting as a type of fraud?

Answer 4

when company assets are intentionally overstated or liabilities are understated in order to make a business appear financially stronger

Question 5

what are the 3 elements of the fraud triangle?

Answer 5

• incentive / pressure (provide motivation to perpetuate fraud)
• rationalisation / attitude (thoughts that justify fraudulent action)
• opportunity (circumstances exist that present an opp to commit fraud)

Question 6

give 3 tests for sales for auditing the income statement.

Answer 6

• analytical review of year end balance (existence, accuracy)
• inspect sample of inventory delivered to customers using EoY goods dispatch notes (cut off)
• inspect sample of after date credit notes using credit notes issued after YE (fraud risk)

Question 7

give 2 tests for purchases for auditing the income statement.

Answer 7

• analytical review of margin using year end balance (completeness, accuracy, fraud risk)
• inspect sample of inventory delivered from customers using EoY goods dispatch notes (cut off)

Question 8

give 3 tests for expenses for auditing the income statement.

Answer 8

• analytical review of year end balance (completeness, accuracy, fraud risk)
• review purchase invoices received after YE to check for accruals (cut off)
• recalculate dep. charge (completeness, accuracy)

Question 9

what is the audit risk associated with sales?

Answer 9

sales are overrstated (existence)

Question 10

what is the fraud risk associated with sales?

Answer 10

credit notes issued after year end (cut off)

Question 11

what is the audit risk associated with purchases?

Answer 11

purchases are understated (completeness)

Question 12

what is the fraud risk associated with purchases?

Answer 12

margin manipulation

Question 13

what is the audit risk associated with expenses?

Answer 13

expenses are understated (completeness)

Question 14

what is the fraud risk associated with expenses?

Answer 14

payroll fraud (ghost employees)