W8 Fraud

Question 1

What is fraud

Answer 1

Fraud is an intentional act by one or more individuals among management, those charged with governance, employees or third parties, involving the use of deceptionto obtain an unjust or illegal advantage

Question 2

What is error

Answer 2

An error can be defined as an unintentional misstatement in financial statements

example:

inaccuracy in gathering or processing data from which financial statements are prepared

incorrect accounting estimate rising from overlooking or clear misinterpretation of facts

Question 3

What is fraudulent financial reporting

Answer 3

Involves “intentional misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users

considered internal fraud

Question 4

How does fraudulent financial reporting occur

Answer 4

Manipulation, falsification or alteration of accounting records or supporting documentation

Misrepresentation or deliberate omission of items in the financial statement

Intentional misapplication of accounting standards or policies

Question 5

What is misappropriation of assets

Answer 5

Involves the theft of an entity’s assets and is often perpetrated by employees in relatively small and immaterial amounts

Question 6

How does misappropriation of assets occur

Answer 6

Embezzling receipts, e.g. diverting income to own bank account

Stealing physical assets or intellectual property

Deliberately causing payment to be made for goods not received

Taking an entity’s assets for personal use

Question 7

How can fraud be classified

Answer 7

Internal fraud – perpetrated against an organization, by individual(s) within that organisation

External fraud – perpetrated against an organization, by individual(s) outside that

Question 8

List some key points on fraud

Answer 8

Must involve deception (deliberate intent)

Fraud is never accidental

Most commonly refers to various forms of theft or misappropriation

Often complex in nature with multiple actions or transactions to both commit and conceal a fraud
- means those with technical knowledge and experience are best placed to commit and conceal fraud

• also highlights the need for multiple forms of internal control

Question 9

What are the director’s responsibilities in respect of fraud? How is it achieved?

Answer 9

The primary responsibility for the prevention and detection of fraud and misconduct always lies with management/those charged with governance

achieved by:

Implementing an effective system of internal control, reducing the opportunities for fraud to take place and increasing the likelihood of detection (and punishment)

Creating a culture of honesty, ethical behaviour and active oversight by those charged with governance

• The directors should be aware of the potential for fraud and this should feature in their risk assessment and corporate governance procedures
• The audit committee should review these procedures to ensure that they are in place and are working effectively

Question 10

What is the internal auditors role in respect to fraud

Answer 10

Can help management fulfil their responsibilities in respect of fraud and error

Typical functions they can perform:

Testing the effectiveness of internal controls at preventing and detecting fraud and error and provide recommendations for improvements

Performing fraud investigations

Performing surprise asset counts to identify misappropriation

Question 11

What are the external auditors responsibilities in respect of fraud

Answer 11

External auditors’ goal is to obtain reasonable assurance whether financial statements as a whole are free from material misstatements, whether due to fraud or error

Fraud is treated as one more reason the financial statement may not be materially true and fair

However, it is important to remember that fraud could be judged to be material by nature rather than due to its monetary size

*no duty on auditors to prevent or detect fraud at all