copyright © 2014 pearson education chapter 11 considering the risk of fraud

Copyright © 2014 Pearson Education

Chapter 11

Considering the Risk of Fraud

Chapter 11

Considering the Risk of Fraud

Copyright © 2014 Pearson Education11-2

Define fraud and distinguish between fraudulent financial reporting and misappropriation of assets.

Describe the fraud triangle and identify conditions for fraud.

Understand the auditor’s responsibility for assessing the risk of fraud and detecting material misstatements due to fraud.


Identify corporate governance and other control environment factors that reduce fraud risks.

Develop responses to identified fraud risks.

Recognize specific fraud risk areas and develop procedures to detect fraud.

Understand interview techniques and other activities after fraud is suspected.


Define fraud and distinguishbetween fraudulent financial

reporting and misappropriation ofassets.

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Management Fraud

Fraudulent financial reporting

Misappropriation of assets


Describe the fraud triangle and identify conditions for fraud.

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Incentives/Pressures

Opportunities Attitudes/Rationalization


Incentives/Pressures:

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


Opportunities:

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


Attitudes/Rationalization:

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


Incentives/Pressures:

Personal financial obligations create pressureto misappropriate assets

Adverse relationships between managementand employees motivate employees tomisappropriate assets


Opportunities:

There is a presence of large amounts of cashon hand or inventory items

There is an inadequate internal control overassets


Attitudes/Rationalization:

Disregard for the need to monitor or reducerisk of misappropriating assets exists

There is a disregard for internal controls


Understand the auditor’s responsibility for assessing the risk of fraud and detecting

material misstatements due to fraud.

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Auditing standards provide guidance to Auditors in assessing the risk of fraud.

Auditing standards state that, in exercising Professional skepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.”


Discussion among engagement team Procedures performed to assess risk Specific risks and audit response Reasons supporting conclusions Results of procedures performed Other conditions and analytical relationships Nature of communications


Identify corporate governance and other control environment factors

that reduce fraud risks.

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1. Culture of honesty and high ethics

2. Management's responsibilityto evaluate risks of fraud

3. Audit committee oversight


Organizational code of conduct

General employee conduct

Conflicts of interest

Outside activities, employment, and directorships


Relationships with clients and suppliers

Gifts, entertainment, and favors

Kickbacks and secret commissions

Organization funds and other assets


Organization records and communications

Dealing with outside people and organizations

Prompt communications

Privacy and confidentiality


Develop responses to identified fraud risks.

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

Design and perform audit proceduresto address fraud risks.

Design and perform procedures toaddress the risk of managementoverride of controls.


Recognize specific fraud risk areas and develop procedures to detect fraud.

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Revenue and accounts receivable fraud risks

Inventory fraud risks

Purchases and accounts payable fraud risks

Other areas of fraud risk


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Informational

Assessment

Interrogative

Evaluating responses

Observing behavioral cues

Listening


Copyright

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copyright © 2014 pearson education chapter 11 considering the risk of fraud

Documents

risk of fraud slide

pearson education chapter

fraud triangle

fraud risks

threatened slide

specific fraud risk

financial stability

assets adverse relationships