9Aud - Planning Activities - Detecting Fraud

Front 1

What AU and SAS No relate to detecting fraud?

Back 1

AU316 and SAS 99

Front 2

What is the title for AU316 and SAS 99?

Back 2

Consideration of Fraud

Front 3

What are the two types of misstatements that are relevant to the auditor's consideration of fraud?

Back 3

Fraudulent Financial Rpting
Misappropriation of Assets

Front 4

What is Fraudulent financial reporting?

Back 4

Where misstatements are intended to deceive financial statement users

Front 5

What is misappropriation of assets?

Back 5

Theft of assets causing the financial statements to be in conflict with GAAP

Front 6

What is the auditor's basic responsibility as it relates to Fraud during planning?

Back 6

A. In general, the auditor is required to design (plan) the audit to provide "reasonable assurance" of detecting misstatements that are material to the financial statements.

B. Specifically, audit team members must have a discussion about how and where the financial statements might be susceptible to material misstatement due to fraud and emphasize the importance of maintaining professional skepticism.

C. The auditor should also discuss the potential for management override of internal controls.

Front 7

In what ways can a failure to detect a material misstatement Not be considered a substandard audit?

Back 7

Auditor may be unable to detect a material misstatement due to forgery, collusion, or upper management involvement, etc.

Front 8

To obtain information needed to identify the risks of material fraud -- what does the auditor emphasize?

Back 8

Inquiry and Analytical Procedures

Front 9

Where should inquiries be documented?

Back 9

In the "Management Representation Letter" at the end of fieldwork

Front 10

In what ways does an auditor inquire about the risk of fraud?

Back 10

Inquire of Mgmt about Knowledge of fraud

2. Inquire about Controls implemented to diminish fraud

3. Inquire of Communications w/those of governance about fraud issues

4. Inquire of Communications w/others (audit com, internal aud, etc)

Front 11

How do analytical procedures provide a way to identify the risk of fraud?

Back 11

By performing analytical procedures involving revenue accounts. Consider any unexpected results associated with analytical procedures

Front 12

What is the presumption about Revenue and Fraud?

Back 12

That improper revenue recognition is a fraud risk --

Front 13

When Revenue is misstated, what is the the auditor's responsibility?

Back 13

The auditor should ordinarily presume a risk of material misstatement due to fraud and perform appropriate procedures (such as analytical procedures)

Front 14

The auditor is required to specifically assess the risk of material misstatement due to fraud. T or F

Back 14

True

Front 15

SAS 99 requires to consider what 3 conditions in associaton with fraud?

Back 15

1. Incentive/Pressure
2. Opportunity
3. Attitude/Rationalization

Front 16

What specific Incentive/Pressure risks should the auditor consider in assessing fraudulent financial reporting?

Back 16

For Incentive Pressure, consider:
a. Financial stability/profitability -- threatened by economic conditions: e.g., operating losses threaten bankruptcy; recurring negative cash flows from operations; vulnerability to rapid changes due to technology or other factors; increasing business failures in the industry; unusual profitability relative to the industry,

b. Excessive pressure to meet the expectations of outsiders -- e.g., overly optimistic press releases; marginal ability to meet exchange listing requirements; difficulty meeting debt covenants; need to obtain additional financing to stay competitive.


2. Consider the Opportunity that's present

Front 17

What specific Opportunity risks should the auditor consider in assessing fraudulent financial reporting?

Back 17

a. Nature of the industry or the entity's operations -- e.g., significant related-party transactions not in the ordinary course of business; ability to dominate suppliers or customers in a certain industry sector; unnecessarily complex transactions close to year-end raise "substance over form" issues; significant bank accounts or business operations in "tax-haven" jurisdictions with no clear business justification; major financial statement elements that involve significant estimates by management that are difficult to corroborate.
b. Ineffective monitoring of management -- e.g., domination of management by a single person or small group without compensating controls; ineffective oversight by those charged with governance.
c. Complex or unstable organizational structure -- e.g., organization consists of unusual legal entities; high turnover of senior management, counsel, or board members.
d. Internal controls are deficient -- e.g., inadequate monitoring of controls; high turnover rates in accounting, internal auditing, and information technology staff; ineffective accounting and information systems (significant deficiencies are material weaknesses).

Front 18

What specific Attitude/Rationalizations justify fraudulent financial reporting?

Back 18

a. Lack of commitment to establishing and enforcing ethical standards.
b. Previous violations of securities laws (or other regulations).
c. Excessive focus by management on the entity's stock price.
d. Management's failure to correct reportable conditions.
e. Pattern of justifying inappropriate accounting as immaterial.
f. Management has a strained relationship with the predecessor or current auditor.