Addthis Arens Chapter11

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Fraud Auditing

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Learning Objective 1

Define fraud and distinguish

between fraudulent financial

reporting and misappropriation

of assets.

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Types of Fraud

_{Fraudulent financial reporting}

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Learning Objective 2

Describe the fraud triangle and

identify conditions for fraud.

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The Fraud Triangle

Incentives/Pressures

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Examples of Risk Factors

for Fraudulent Reporting

_{Financial stability or profitability is threatened by}

economic, industry, or entity operating conditions

_{Excessive pressure exists for management to}

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Examples of Risk Factors

for Fraudulent Reporting

_{There are significant accounting estimates that}

are difficult to verify

_{There is ineffective oversight over financial}

reporting

_{High turnover or ineffective accounting, internal}

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Examples of Risk Factors

for Fraudulent Reporting

_{Inappropriate or inefficient communication}

and support of the entity’s values is evident

_{A history of violations of laws is known}

_{Management has a practice of making}

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Examples of Risk Factors

for Misappropriation of Assets

_{Personal financial obligations create pressure}

to misappropriate assets

_{Adverse relationships between management}

and employees motivate employees to misappropriate assets

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Examples of Risk Factors

for Misappropriation of Assets

_{There is a presence of large amounts of cash}

on hand or inventory items

_{There is an inadequate internal control over}

assets

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Examples of Risk Factors

for Misappropriation of Assets

_{Disregard for the need to monitor or reduce}

risk of misappropriating assets exists

_{There is a disregard for internal controls}

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Learning Objective 3

Understand the auditor’s

responsibility for assessing

the risk of fraud and detecting

material misstatements due to

fraud.

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Assessing the Risk of Fraud

SAS 99 provides guidance to auditors in assessing the risk of fraud.

SAS 1 states that, in exercising professional

skepticism, an auditor “neither assumes that management is dishonest nor assumes

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Sources of Information Gathered

to Assess Fraud Risks

Communication

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Documenting Fraud

Assessment

_Discussion

_{Specific risks}

_Procedures

_Reasons

_{Nature of communications}

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Learning Objective 4

Identify corporate governance

and other control environment

factors that reduce fraud risks.

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Corporate Governance Oversight

to Reduce Fraud Risks

1. Culture of honesty and high ethics

2. Management's responsibility to evaluate risks of fraud

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Example Elements for a Code

of Conduct

_{Organizational code of conduct}

_{General employee conduct}

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Example Elements for a Code

of Conduct

_{Relationships with clients and suppliers}

_{Gifts, entertainment, and favors}

_{Kickbacks and secret commissions}

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Example Elements for a Code

of Conduct

_{Organization records and communications}

_{Dealing with outside people and organizations}

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Organizational Factors

Contributing to Risk of Fraud

Collusion between employees and third parties Inadequate internal controls Management override of internal controls

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Organizational Factors

Contributing to Risk of Fraud

Collusion between employees and management Lack of control over management by directors Ineffective or nonexistent ethics or

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Learning Objective 5

Develop responses to identified

fraud risks.

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Responding to the Risk of Fraud

Change the overall conduct of the audit to respond to identified fraud risks.

Design and perform audit procedures to address identified risks.

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Learning Objective 6

Recognize specific fraud risk

areas and develop procedures

to detect fraud.

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Initial Detection Method for Million Dollar

Schemes

Tip

By Accident

Internal Audit

Internal Controls

External Audit

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Specific Fraud Risk Areas

_{Inventory fraud risks}

_{Revenue and accounts receivable fraud risks}

_{Purchases and accounts payable fraud risks}

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Learning Objective 7

Understand interview techniques

and other activities after fraud

is suspected.

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Responding to Misstatements That

May Be the Result of Fraud

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Types of Inquiry Techniques

_{Informational inquiry}

_{Assessment inquiry}

_{Interrogative inquiry}

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