©2010 prentice hall business publishing, auditing 13/e, arens/elder/beasley 11 - 1 fraud auditing...
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©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 11 - 1
Fraud AuditingFraud Auditing
Chapter 11Chapter 11
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 11 - 11 - 22
Types of FraudTypes of Fraud
Fraudulent financial reporting
Misappropriation of assets
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 11 - 11 - 33
The Fraud TriangleThe Fraud Triangle
Incentives/Pressures
Opportunities Attitudes/Rationalization
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Examples of Risk FactorsExamples of Risk Factorsfor Fraudulent Reportingfor Fraudulent Reporting
Financial stability or profitability is threatened byeconomic, industry, or entity operating conditions
Excessive pressure exists for management tomeet debt requirements
Personal net worth is materially threatened
Incentives/Pressures:
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 11 - 11 - 55
Examples of Risk FactorsExamples of Risk Factorsfor Fraudulent Reportingfor Fraudulent Reporting
There are significant accounting estimates thatare difficult to verify
There is ineffective oversight over financialreporting
High turnover or ineffective accounting, internalaudit, or information technology staff exists
Opportunities:
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Examples of Risk FactorsExamples of Risk Factorsfor Fraudulent Reportingfor Fraudulent Reporting
Inappropriate or inefficient communicationand support of the entity’s values is evident
A history of violations of laws is known
Management has a practice of makingoverly aggressive or unrealistic forecasts
Attitudes/Rationalization:
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 11 - 11 - 77
Examples of Risk FactorsExamples of Risk Factorsfor Misappropriation of Assetsfor Misappropriation of Assets
Personal financial obligations create pressureto misappropriate assets
Adverse relationships between managementand employees motivate employees tomisappropriate assets
Incentives/Pressures:
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Examples of Risk FactorsExamples of Risk Factorsfor Misappropriation of Assetsfor Misappropriation of Assets
There is a presence of large amounts of cashon hand or inventory items
There is an inadequate internal control overassets
Opportunities:
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Examples of Risk FactorsExamples of Risk Factorsfor Misappropriation of Assetsfor Misappropriation of Assets
Disregard for the need to monitor or reducerisk of misappropriating assets exists
There is a disregard for internal controls
Attitudes/Rationalization:
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Assessing the Risk of FraudAssessing the Risk of Fraud
SAS 99 provides guidance to auditorsin assessing the risk of fraud.
SAS 1 states that, in exercising professionalskepticism, an auditor “neither assumes thatmanagement is dishonest nor assumesunquestioned honesty.”
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 11 - 11 - 1111
Sources of Information GatheredSources of Information Gatheredto Assess Fraud Risksto Assess Fraud Risks
Communicationamong audit team
Inquiries ofmanagement
Riskfactors
Analyticalprocedures
Otherinformation
Identified risks of material misstatements due to fraud
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Documenting Fraud Documenting Fraud AssessmentAssessment
Discussion
Specific risks
Procedures
Reasons
Nature of communications
Other conditions and analytical relationships
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 11 - 11 - 1313
Corporate Governance OversightCorporate Governance Oversightto Reduce Fraud Risksto Reduce Fraud Risks
1. Culture of honesty and high ethics
2. Management's responsibilityto evaluate risks of fraud
3. Audit committee oversight
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Organizational Factors Organizational Factors Contributing to Risk of FraudContributing to Risk of Fraud
2003 1998 1994
Collusion betweenemployees and
third parties
Inadequateinternalcontrols
Managementoverride of
internal controls
483133
395859
313636
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Organizational Factors Organizational Factors Contributing to Risk of FraudContributing to Risk of Fraud
Collusion betweenemployees and
management
Lack of controlover management
by directors
Ineffective ornonexistent ethics orcompliance program
151923
1211 6
10 8 7
2003 1998 1994
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 11 - 11 - 1616
Responding to the Risk of FraudResponding to the Risk of Fraud
Change the overall conduct of the auditto respond to identified fraud risks.
Design and perform audit proceduresto address identified risks.
Design and perform procedures toaddress the risk of managementoverride of controls.
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Initial Detection Method for Million Dollar Initial Detection Method for Million Dollar SchemesSchemes
Tip
By Accident
Internal Audit
Internal Controls
External Audit
Notified By Police
$1,000,000+
All Cases
0% 10% 20% 30% 40% 50%
Note: The sum of percentages in this chart exceeds 100 percent because in some cases respondents identified more than one detection method.
42.3%
46.2%
22.8%
20.0%
18.6%19.4%
16.7%23.3%
15.8%9.1%
6.0%3.2%
Typ
e of
Det
ectio
n
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens//Elder/Beasley Arens//Elder/Beasley 11 - 11 - 1818
Specific Fraud Risk AreasSpecific Fraud Risk Areas
Inventory fraud risks
Revenue and accounts receivable fraud risks
Purchases and accounts payable fraud risks
Other areas of fraud risk
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Responding to Misstatements That Responding to Misstatements That May Be the Result of FraudMay Be the Result of Fraud
When fraud is suspected, the auditor gathersadditional information to determine whetherfraud actually exists.
©2010 Prentice Hall Business Publishing, ©2010 Prentice Hall Business Publishing, Auditing 13/e,Auditing 13/e, Arens/Elder/Beasley Arens/Elder/Beasley 11 - 20
End of Chapter 11End of Chapter 11
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