Vocabulary-Fraud Flashcards
According to The Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing, the internal audit team must evaluate the potential for the occurrence of fraud, as well as the organization’s fraud risk management initiatives. T/F
True
According to The Institute of Internal Auditors’ Standard 2120.A2, the internal audit activity must evaluate the potential for the occurrence of fraud and how the organization manages fraud risk.
According to PCAOB Auditing Standard No. 5, an auditor should implement a bottom-up approach when auditing an entity’s internal control over financial reporting. T/F
False
According to PCAOB Auditing Standard No. 5, auditors should implement a top-down approach in performing an audit of internal control over financial reporting. A top-down approach “begins at the financial statement level and with the auditor’s understanding of the overall risks to internal control over financial reporting. The auditor then focuses on entity-level controls and works down to significant accounts and disclosures and their relevant assertions.” (Paragraph 21) This approach focuses auditors on those accounts, disclosures, and assertions that are most likely to result in material misstatement of the company’s financial statements. The standard makes explicit mention, however, that this approach describes the auditor’s thought process when identifying risks and the controls to test, rather than the order in which the auditor should perform the audit procedures.
According to The Institute of Internal Auditors’ International Standards for the Professional Practice of Internal Auditing, internal auditors must apply the care and skill of an expert whose primary responsibility is investigating fraud. T/F
False
Internal Auditing Standard 1220 states that internal auditors must apply the care and skill expected of a reasonably prudent and competent internal auditor. The standard also states, however, that due professional care does not imply infallibility.
AU Section 240 delineates two types of frauds that are relevant for audit purposes: those that involve intentional fraudulent omissions or inclusions in the financial statements and those that involve the theft or misuse of company assets. T/F
True
AU Section 240 outlines the two primary types of fraud-related misstatements that are considered relevant for audit purposes: misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets. Fraudulent financial reporting occurs through intentional fraudulent omissions or inclusions in the financial statements. Asset misappropriation involves the theft or misuse of company assets.
According to the requirements of the Sarbanes-Oxley Act, which of the following parties is responsible for establishing procedures to handle complaints regarding irregularities in a publicly traded company’s accounting methods, internal controls, or auditing matters?
Audit Committee
The Sarbanes-Oxley Act has several provisions that set out specific requirements for the audit committees of public companies. Specifically, the audit committee has the sole responsibility for hiring, overseeing, and paying the external auditors and for resolving any disputes that arise between the auditors and management regarding financial reporting issues. The audit committee is also required to establish procedures (e.g., a hotline) for receiving, retaining, and dealing with complaints, including confidential or anonymous employee tips, regarding irregularities in the company’s accounting methods, internal controls, or auditing matters. Additionally, the committee is required to pre-approve all services to be performed by the external auditors. While the audit committee may consult with outside advisors, it is not required to approve those advisors hired by management.
The Private Securities Litigation Reform Act requires public company audits to include procedures designed to provide reasonable assurance of detecting __________ that would have a direct and material effect on the financial statements.
Illegal Acts (not fraud) The Private Securities Litigation Reform Act (PSLRA), passed in 1995, sets forth several responsibilities for independent auditors of public companies. One of the requirements is that each audit of the financial statements of a public company includes procedures designed to provide reasonable assurance of detecting illegal acts that would have a direct and material effect on the determination of financial statement amounts.
Specific corporate governance practices for publicly traded U.S. corporations are mandated by the Uniform Corporate Governance Act. T/F
False
There is no U.S. law called the Uniform Corporate Governance Act.
In the United States, corporate governance requirements are found in legislative and regulatory requirements imposed upon corporations. Each state has laws governing those corporations that are registered in it. Additionally, public companies are subject to federal legislation, as well as regulation by securities industry oversight bodies. The most significant corporate governance requirements for these companies are found in the Sarbanes-Oxley Act, as well as in the rules laid out by the New York Stock Exchange (NYSE) and NASDAQ for companies listed on those markets.
What are core principles of sound corporate governance
AFTeR
Most systems of corporate governance are focused on several core principles or values, which include: • Accountability • Transparency • Fairness • Responsibility
The boards of directors of companies that are listed on the NYSE or NASDAQ must be composed of a majority of independent directors. T/F
True
Companies with securities listed on the NYSE are bound by the corporate governance requirements contained in the NYSE Listed Company Manual; similarly, the corporate governance standards issued as part of the NASDAQ Equity Rules apply to all entities with securities listed on the NASDAQ exchange. Both the NYSE and the NASDAQ rules state that a majority of the directors on a listed company’s board must be independent.
The purpose of corporate governance is to:
Encourage the efficient use of resources and require accountability for the stewardship of those resources.
Sir Adrian Cadbury, chairman of the committee that developed the foundational corporate governance guidance The Cadbury Report, stated that the purpose of corporate governance is “to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations, and society.”
Are opinions or attestations about a fraud-free environment Certified Fraud Examiners allowable?
No,
Fraud examiners must always perform their work with an attitude of skepticism and begin with the belief that something is wrong or someone is committing a fraud (depending on the nature of the assignment and the preliminary information available). Furthermore, fraud examiners should relax their attitude of skepticism only when the evidence shows no signs of fraudulent activity. At no time is a Certified Fraud Examiner entitled to assume a fraud problem does not exist. Thus, professional skepticism can be dispelled only by evidence. As a result, opinions or attestations about a fraud-free environment are absolutely prohibited for Certified Fraud Examiners.
A Certified Fraud Examiner is strictly prohibited from accepting an assignment to uncover fraud in a company in which he has a major interest? T/F
False
Article II of the Certified Fraud Examiner Code of Professional Ethics states: “A CFE shall not engage in any illegal or unethical conduct, or any activity which would constitute a conflict of interest.” However, a Certified Fraud Examiner does not have the same responsibilities as a Certified Public Accountant. For example, a CPA generally would not be able to express an audit opinion on a company in which he held a major financial interest. In the case of the Certified Fraud Examiner, he would be able to accept such an assignment under most conditions, since the goal of the Certified Fraud Examiner is to gather facts regarding a potential fraud, not express an opinion. The fraud examiner should, however, make appropriate disclosures regarding his ownership.
Under the Certified Fraud Examiner Code of Professional Ethics, information provided to a CFE by a client is considered privileged information and is therefore protected from being legally demanded by outside parties. T/F
False
Privileged information is information that cannot be demanded, even by a court. Common law privileges exist for husband-wife and attorney-client relationships, and physician-patient and priest-penitent relationships have obtained the privilege through state statutes. In all the recognized privileged relationships, the professional person is obligated to observe the privilege, which can be waived only by the client, patient, or penitent. Likewise, the Certified Fraud Examiner’s client or employer is the holder of the confidence. Certified Fraud Examiners, like CPAs and similar professionals, do not have protected privileges in common law or statute.
The CFE Code of Professional Ethics prohibits CFEs from engaging in conflicts of interest. What are examples of conflicts of interest?
The CFE Code of Professional Ethics states that Certified Fraud Examiners shall not engage in conflicts of interest. A conflict of interest exists when a fraud examiner’s ability to objectively evaluate and present an issue for a client is impaired by a current, prior, or potential future relationship with parties to the fraud examination.
Deciding if a conflict or a community of interests exists depends on the facts of each particular situation; however, the following are some general rules concerning conflicts of interest:
A Certified Fraud Examiner employed full time by a company should not engage in other jobs that create a hardship or loss to the employer.
A fraud examiner should not be a “double agent” employed by one company, but retained by another company or person to infiltrate the employer and transmit inside information (unless, of course, the employing company agrees to the arrangement in order to apprehend other parties employed by the company).
A Certified Fraud Examiner should not accept engagements from both sides to a controversy—just like lawyers are prohibited from representing both parties in a transaction, lawsuit, or trial.
In general, the lowest level of reference for making moral decisions is:
the law
When faced with an ethics-related problem, it is tempting and appropriate to begin analyzing the issue by asking: Is it legal? The law, including professional rules and regulations, deals with actions that are permitted and prohibited, but it is the lowest level of reference for moral decisions; a law might permit an action that is prohibited by a profession’s code of ethics. Laws, rules, and regulations function as standards by which to judge whether an action is acceptable or illegal, but not whether the behavior is right. For instance, if you have promised an individual that you will honor a contract, you are ethically bound to do so, regardless of your legal responsibility; under these facts, keeping your word is the right thing to do, no matter what the law says.
