Planning - Fraud: Eval and Communication Flashcards
Disclosure of irregularities (fraud) to 3rd parties (beside client senior mgmt and audit committee)
- to SEC when client reports an auditor change
- to successor auditor when appropriate inquiries made
- to govt funding agency if client receives financial assistance
What auditor should do when discovering misstatement due to fraud w/o material impact to FS
s/he should consider implications for other aspects of audit
What are auditor’s responsibilities when discovering all fraud involving senior mgmt
report to audit committee regardless of amount
Least likely to be required on audit
make legal determination of whether fraud has occurred
Discovered Info may raise question about illegal acts
- Large checks payable to cash (cash pmt: unusual and difficult to control compared to acct payable)
- Unexplained payments made to govt employees
What to do if management fails to take remedial actions with illegal bribes (even if immaterial to FS) to public officials
May consider withdrawal from engagement since it affects auditor’s ability to rely on mgmt representation
Material misstatements include
material errors, material fraud, certain illegal acts
If specific info implies noncompliance with laws that can result in material but indirect effect on FS
auditor should apply audit procedure to determine whether an illegal act has occurred
Audit procedures must provide reasonable assurance of detecting
accrual and billing of improper amt of revenue under govt contracts
Auditor notified Board of certain uncorrected illegal acts which may lead to qualified opinion
Board refused to take remedial actions and inform SEC about the notification
Auditor is required to report to SEC w/i one business day
why the auditor’s examination cannot reasonably be expected to bring noncompliance with all laws by the client to the auditor’s attention
Illegal acts by clients often relate to operating aspects rather than accounting aspects
Board’s refusal to take remedial action of illegal acts will impact
auditor’s degree of reliance on mgmt representation letter
Auditor’s use of outside specialist’s work requires
- auditor to understand objective and scope of specialist’s work
- auditor to assess specialist’s objectiveness, competence, and capability
- ok if specialist has relationship w client
Auditor may refer specialist work in audit report w/ specialist permission
if opinion is modified as a result of specialist’s work and auditor believes readers will have better understanding
- include in an explanatory paragraph to audit report
In using specialist’s work, an understanding among auditor, client, and specialist should cover
specialist’s understanding of auditor’s corroborative use of specialist’s findings
Auditor’s required communications with entity audit committee
- need not to be before issuing report
- oral or writing
Auditor’s required communications with entity audit committee
INCLUDE
-sig acct policies
-mgmt judgments
-acct est
-sig audit adj
-disagreement w mgmt
-mgmt consultations w other accountants about auditing and acct matters
-difficulties encountered in performing audit
-all uncorrected misstatements unless deemed trivial
- effects of significant accounting policies adopted by management in emerging areas for which there is no authoritative guidance
BUT mgmt needs to communicate w Board about selection (not Auditor)
-NOT include materiality level used by auditor
Weakness in internal control
must be recommunicated
Purpose of Second (or Cold) review of audit engagement
fair presentation in conformity w GAAP
whether sufficient appropriate evidence obtained
