Set 1 - AU Chapter 7 - Fraud

Question 1

When is the assessment of fraud risk undertaken?

Answer 1

During the planning stage.

Question 2

What are the two types of fraud?

Answer 2

Fraudulent financial reporting

Mis-appropriation of assets

Question 3

Name some conditions that create an environment for fraud

Answer 3

• inadequate corporate governance
• lack of tone at the top
• inadequate financial control
• large financial incentives
• complex business operations
• high expectations by investors

Question 4

3 pillars for fraud to occur

Answer 4

• incentives and pressures
• opportunity
• rationalization

Question 5

3 objectives of auditor in regards to fraud

Answer 5

• identify and assess risks of material misstatement due to fraud
• obtain sufficient audit evidence regarding assessment of material misstatement due to fraud
• respond appropriately to fraud or suspected fraud during the audit

Question 6

Give 4 examples of audit response to fraud risk

Answer 6

• assigning additional personnel with specialized knowledge
• evaluating selected accounting policies and transactions more carefully
• including an element of unpredictability
• heightening professional skepticism

Question 7

What should auditors do when they identify fraud?

Answer 7

• communicate immediately with those in the organization with responsibility for fraud
• if management is suspected, communicate with board of directors
• may need to communicate with third party, but confidentiality must also be considered