Lecture 18 - Fraud and Going Concern

Question 1

What is the standard for fraud?

Answer 1

ISA 240

Question 2

What is the definitive of fraud?

Answer 2

The use of DECEPTION to obtain an UNJUST or ILLEGAL FINANCIAL ADVANTAGE and intensional misrepresentations affecting the FINANCIAL STATEMENTS by one or more individuals among management, employees, or third parties

Question 3

What did the Kingston Cotton Mill (1896) case establish?

Answer 3

“The auditor is a watchdog not a bloodhound”

Question 4

What was the initial case that set out the auditors role in detecting fraud?

Answer 4

The Kingston Cotton Mill Case (1896)

Question 5

What are staff indicators of fraud?

Answer 5

• Directors being authoritarian
• Staff poorly qualified
• Individuals paid by results
• Individuals allowed too much authority
• Staff turnover is high

Question 6

What are environmental indicators of fraud?

Answer 6

• Previous experience with questionable integrity/competence of management
• Financial reporting pressures
• Weak internal controls
• Unusual transactions
• Problems obtaining evidence

Question 7

What key points does ISA 240 make?

Answer 7

• Auditors should make enquiries of management on their statement of fraud risk
• Auditors should make specific enquiries as to actual or suspected fraud
• Auditors should design appropriate audit procedures in response to assessed risk or material fraud
• Element of unpredictability should be in audit testing

Question 8

What should auditors do if fraud is detected?

Answer 8

• Discuss with directors
• If directors involved, discuss with audit committee
• May seek legal advice, or in some cases report to 3rd parties (e.g. money laundering)

Question 9

What happened with the Great Salad Oil fraud?

Answer 9

Barrels of oil used to secure loans, floated oil on water, overvaluing their assets
$175 million overstated

Question 10

What happened with Parmalat?

Answer 10

€4billion fictitious transaction in Cayman Islands

Complicated corporate structure hid liabilities and overstated profits

Question 11

What happened with the Satyam?

Answer 11

Indian company, 94% ($1billion) of assets fictitious

Creation of fake invoices and receivables

Question 12

How much fraud is estimated in the UK?

Answer 12

£14bn - £32bn

Question 13

What % of fraud is committed by middle managers or above?

Answer 13

82%

Question 14

What % of fraud is committed by accounting and finance staff?

Answer 14

40%

Question 15

What % of people who are aware for fraud occurring have not come forward?

Answer 15

40%

Question 16

What is the standard for Going Concern?

Answer 16

ISA 570

Question 17

What are the going concern assessment procedures?

Answer 17

• Industry assessment
• Discussion of directors assessment
• Data available to make the assessment
• Assumptions made by entity
• Obligations

Question 18

What are some warning signs of going concern?

Answer 18

• Redundancies
• Management
• Market
• Legal liabilities
• Legislation

Question 19

What circumstances would you have an emphasis of matter paragraph for going concern?

Answer 19

If there’s material uncertainty, but this has been mentioned in the report

Question 20

What circumstances would you have “Except for” (Qualified opinion) of matter paragraph for going concern?

Answer 20

Where there is uncertainty and the directors have failed to disclose it

Question 21

What circumstances would you have an adverse opinion paragraph for going concern?

Answer 21

Where the auditors do not believe the going concern opinion is correct