Lecture 11 - Fraud and Audit Flashcards
An error is….
“An unintentional misstatement in the financial statements, including omission
of an amount or a disclosure”
Fraud is….
“An intentional act by one or more individuals (internal or external to the company) involving the use of deception to obtain and unjust or illegal advantage”
Who is has the primary responsibility for detection and prevention of fraud?….
Those charged with governance of an entity and the management they oversee
It is not the auditors responsibility to detect or prevent fraud! It is the auditors responsibility to:
- To identify and assess the risks of material misstatement of the financial statements due to fraud;
- To obtain sufficient appropriate audit evidence regarding the assessed risks….
- To respond appropriately to fraud or suspected fraud during the audit
Professional judgement is…..
The application of relevant training, knowledge and experience….. in making informed decisions about the courses of action that are appropriate in the
circumstances of the audit engagement
Professional scepticism is……
An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence
Examples of financial statement frauds:
- Fictitious sales
- Improper expense recognition
- Incorrect asset valuation
- Hidden liabilities
- Unsuitable disclosures
- Cookie-jar accounting
- Extreme — total fabrication of financial statements
Financial statement frauds accomplished by…..
- Manipulation of accounting records;
- misrepresentation/omission of transactions or events;
- misapplication of accounting principles
- Inappropriate disclosures
Fraudulent financial reporting risk factors: Incentives/pressures
- Financial stability/profitability is threatened
- Excessive pressure on management to meet goals
- Personal financial situation of management/employees
Fraudulent financial reporting risk factors: Opportunities
- Nature of the entity’s operations
- Ineffective monitoring of management
- Complex/unstable organisational structure
- Deficient internal controls
Fraudulent financial reporting risk factors: Attitudes/rationalisation
• Inappropriate values and ethical standards
Misappropriation of assets: Incentives
- Personal financial situation
* Anticipated layoffs; pay restructuring; adverse promotion expectations
Misappropriation of assets: Opportunities
- Cash business
- Small, high value, high demand inventory with easily marketable
- Inadequate internal controls/management oversight
Misappropriation of assets: Rationalisation
• Inappropriate values and ethical standards
Indicators of the possibility of fraud, for example:
- Discrepancies in accounting records
- Conflicting or missing evidence
- Problematic or unusual relationship between management and the auditor
- Judgements, behaviour, lifestyle of management and employees not what is expected
