Possibility Of Fraud Flashcards
Possibility
ISA 240 provides examples of circumstances that may indicate the possibility of fraud, leading to material misstatements in financial statements. These circumstances can be categorized into discrepancies in accounting records, conflicting or missing evidence, and problematic relationships between the auditor and management.
Discrepancies in Accounting Records:
- Incomplete or Untimely Transactions: Transactions not recorded completely or timely, or improperly recorded in terms of amount, period, classification, or policy.
- Example: Sales recorded in the wrong period to inflate revenue.
- Unsupported or Unauthorized Balances: Balances or transactions that lack proper support or authorization.
- Example: Unauthorized journal entries made to adjust financial results.
- Last-Minute Adjustments: Significant adjustments made at the end of the reporting period.
- Example: Large expense reclassifications just before year-end.
- Inconsistent System Access: Employees accessing systems and records beyond their authorized duties.
- Example: A non-financial employee accessing financial records.
- Tips or Complaints: Reports from employees or others about suspected fraud.
- Example: Anonymous tips about financial irregularities.
Conflicting or Missing Evidence:
- Missing Documents: Important documents that are unavailable.
- Example: Missing invoices or contracts.
- Altered Documents: Documents that appear to have been tampered with.
- Example: Altered bank statements.
- Photocopied Documents: Reliance on photocopies when originals are expected.
- Example: Only photocopied receipts provided for significant expenses.
- Unexplained Reconciliation Items: Significant unexplained items in reconciliations.
- Example: Unexplained differences in bank reconciliations.
- Unusual Financial Trends: Unusual changes in financial statement ratios or trends.
- Example: Receivables growing faster than sales.
- Inconsistent Responses: Vague or implausible responses from management or employees.
- Example: Inconsistent explanations for financial discrepancies.
- Discrepancies in Confirmations: Differences between entity records and confirmation replies.
- Example: Customer confirmations not matching accounts receivable records.
- Missing Checks: Missing or non-existent canceled checks.
- Example: Missing checks that should have been returned with bank statements.
- Missing Inventory: Significant inventory or physical assets unaccounted for.
- Example: Missing high-value inventory items.
- Unavailable Electronic Evidence: Missing electronic records inconsistent with retention policies.
- Example: Missing electronic transaction logs.
- Confirmation Response Issues: Fewer or more responses to confirmations than expected.
- Example: Unusually low response rate to receivables confirmations.
- Inability to Produce Evidence: Inability to provide evidence of key system changes or testing.
- Example: Lack of documentation for system upgrades.
Problematic Relationships with Management:
- Denial of Access: Management denying access to records, facilities, or personnel.
- Example: Refusing auditor access to key financial records.
- Undue Time Pressures: Imposing unrealistic deadlines on auditors.
- Example: Pressuring auditors to complete the audit quickly.
- Complaints and Intimidation: Management complaints or intimidation of auditors.
- Example: Management threatening auditors over critical findings.
- Delays in Providing Information: Unusual delays in providing requested information.
- Example: Delaying the provision of financial data.
- Unwillingness to Facilitate Access: Refusing to allow access to electronic files for testing.
- Example: Denying access to IT systems for audit testing.
- Denial of Access to IT Staff: Refusing access to key IT personnel.
- Example: Preventing auditors from interviewing IT staff.
- Reluctance to Revise Disclosures: Unwillingness to add or revise financial statement disclosures.
- Example: Refusing to disclose significant risks or uncertainties.
Scenario 1: Fraudulent Financial Reporting
- Situation: A company faces declining margins and engages in significant related party transactions to inflate revenue.
- Fraudulent Action: Management records fictitious sales to a related party.
- Outcome: Financial statements are misstated, misleading investors.
Scenario 2: Misappropriation of Assets
- Situation: An employee in the warehouse has access to high-value inventory items.
- Fraudulent Action: The employee steals small, high-value items and sells them.
- Outcome: The company suffers inventory losses, and internal controls are compromised.
By understanding these circumstances, auditors can better identify and assess the risks of material misstatement due to fraud, ensuring a thorough and effective audit process. If you have any further questions or need more detailed examples, feel free to ask!
