This document discusses the conceptual framework for financial accounting and auditing principles.
The conceptual framework provides guidance for standards setting, preparing financial reports, and interpreting standards. It aims to reduce inconsistencies and creative accounting. The framework outlines key concepts like recognition, measurement, presentation and enhances qualities like comparability.
The document also discusses auditing regulation. The accountancy profession plays a vital role in business and is intended to provide objective counsel. It is a specialized field that requires mastery of skills obtained through training. Regulatory bodies like the Board of Accountancy in the Philippines establish qualifications and powers to govern the practice of accountancy.
This document discusses the conceptual framework for financial accounting and auditing principles.
The conceptual framework provides guidance for standards setting, preparing financial reports, and interpreting standards. It aims to reduce inconsistencies and creative accounting. The framework outlines key concepts like recognition, measurement, presentation and enhances qualities like comparability.
The document also discusses auditing regulation. The accountancy profession plays a vital role in business and is intended to provide objective counsel. It is a specialized field that requires mastery of skills obtained through training. Regulatory bodies like the Board of Accountancy in the Philippines establish qualifications and powers to govern the practice of accountancy.
This document discusses the conceptual framework for financial accounting and auditing principles.
The conceptual framework provides guidance for standards setting, preparing financial reports, and interpreting standards. It aims to reduce inconsistencies and creative accounting. The framework outlines key concepts like recognition, measurement, presentation and enhances qualities like comparability.
The document also discusses auditing regulation. The accountancy profession plays a vital role in business and is intended to provide objective counsel. It is a specialized field that requires mastery of skills obtained through training. Regulatory bodies like the Board of Accountancy in the Philippines establish qualifications and powers to govern the practice of accountancy.
This document discusses the conceptual framework for financial accounting and auditing principles.
The conceptual framework provides guidance for standards setting, preparing financial reports, and interpreting standards. It aims to reduce inconsistencies and creative accounting. The framework outlines key concepts like recognition, measurement, presentation and enhances qualities like comparability.
The document also discusses auditing regulation. The accountancy profession plays a vital role in business and is intended to provide objective counsel. It is a specialized field that requires mastery of skills obtained through training. Regulatory bodies like the Board of Accountancy in the Philippines establish qualifications and powers to govern the practice of accountancy.
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INTERMEDIATE ACCOUNTING 3 User’s Decision
Conceptual Framework for Financial Accounting -Buying, selling, holding entity
(Revised) -Exercising votes on Why Develop Conceptual Framework? -providing or settling loan - Stochastic Solutions User’s Assessment - Judgments, Models, Estimates -prospects for future net cash inflows - Conflicting Standards - Creative accounting -mngt. Stewardship of economic resources - Political Forces Information needed - Rule-based system -economic resources, claims against entities *Conceptual Framework is not an accounting standard itself. Existing IFRS will prevail than the C.F. -how efficient and effective the mngt. in discharging the economic resources Purpose of C.F Users of F.S 1. Assist the board to develop IFRS Standards 2. Assist preparers of financial reports to develop -Investors (Potential and current) consistent accounting policies for transactions -Lenders and other Creditors 3. Assist all parties to understand and interpret -Employees standards -Suppliers and other trade creditors Effectivity of the C.F -Government agencies (to regulate the activities, taxes) -Immediately for the Board and the IFRS Interpretations Committee -Public (contribute to the locality, giving job opportunities) - Annual Periods on or after Jan1, 2020, those develop an accounting policy based on C.F Information provided by reporting entity Why revised it? -Financial Position -Priority by stakeholder -financial performance -Filling the gaps (guidance on measurement etc.) -Changes in economic resources and claims -Updating Objectives of Reporting entity -Clarifying -Consolidated F.S (parents and subsidiary) Main Changes? -Unconsolidated (parents only) (New) -Combined (not related consolidated entity e.g. siblings’s entity FS) -Measurement and factors it consider in selecting *Underlying Assumption- Going Concern Basis -Presentation and disclosure (When to classify) Fundamental Q.C -Derecognition (guidance in removing items in F.S) *Relevance--- Predictive Value and Confirmatory (Updated) Vaue; Materiality (magnitude of info to where item -Definition could be measured) -Recognition (When to?) *Faithful Representation--- Neutrality (free from bias, (Clarified) use of exercise of prudence), Complete (all relevant info must be included), Free from error (not -Prudence (neutrality) accurately, but doesn’t have mistakes and error); -Management Stewardship (Need of information) Measurement Uncertainty -Measurement Uncertainty Enhancing Q.C -Substance(/) over form *Comparability--- consistency *Verifiability--- consensus, different users can reach 1. Fair Value- reflects market participants current same thoughts about financial information (although measurement about amount, timing and not purely) uncertainty 2. Value in Use/ Fulfillment Value- Current *Timeliness--- capable of influence users at a time expectations in an item. Present value of future *Understandability--- clearly and concisely; cash flows, from continuing use until its reasonable knowledge disposal Cost- pervasive Constraint. “Cost should not exceed its 3. Current Cost- reflects the condition of the item benefits.” in the current time. (Net Realizable Value)
ASSET- elements are: Presentation and Disclosure Concepts
1. Rights- to use, to sell, pledge the object, -Effective Communication of FS
other undefined rights. -Should have Communication tools 2. potential for economic benefits- does not Statement of Profit or Loss need to be certain. It’s only necessary that at least one circumstances it’ll give benefit. Other Comprehensive Income 3. Control- present ability to direct resource Concept of Recycling- income and expensive in OCI used. are not subsequently recycled. Hence, it will be LIABILITY- elements are: directed to the equity. 1. no practical ability to avoid or transfer- only in Concepts of Capital liquidation (under such circumstances) Financial C- Capital=Net Assets 2. obligation to transfer an economic resource- it does not need to be certain. Physical C-Capital= Productivity Capacity 3. present obligation as a result of past events- had already obtained economic resource. 4. executory contract- equally unperformed, establishes single asset/liability for the inseparable right/obligation to exchange economic resource. Recognition – inclusion of item that meets definition of an account (A,L,Eq,I,&Ex) Recognition Criteria 1. Relevance- Existence Uncertainty, Low Probability of flow of economic benefits 2. Faithful Representation – Measurement Uncertainty, Recognition Inconsistency (Accounting mismatch), Presentation and Disclosure Derecognition- removal of all or part of recognized asset or liability in the financial position Application 1. Asset- losses control in the item 2. Liability- no longer have the present obligation Measurement of Elements Historical Cost- reflects price of transaction, original cost when acquired by entity. Current Value AUDITING PRINCIPLES BOA is composed of a Chairman and six (6) members, a vice chairman is elected. The four sectors shall, as much as AUDITING AND ASSURANCE PRINCIPLE possible be equitably represented in the board Qualifications THE ACCOUNTANCY PROFESSION: PRACTICE AND 1. Must be natural born citizen and resident of the Ph. REGULATION 2. Must be a duly registered CPA with AT LEAST 10 years Accountancy – plays a VITAL ROLE in the overall of work experience in any practice of accountancy business and economic environment. 3. Must be a good moral character and must not have been Accounting – Language of business convicted of crimes involving moral turpitude Profession 4. Must not have any pecuniary interest, in any educational Definition Characteristics institution conferring and academic degree necessary for admission to the practice of accountancy or where review Vocation Mastery of particular class in preparation for CPALE are being offered or Specialized educational intellectual skill, acquired conducted. training by training and education. Note: Five (5) nominees of PICPA will be passed to PRC, Intended to supply Adhere by its member PRC will pick three (3) to be recommend to the Philippine objective counsel and to a common code of president and the president will appoint one (1)to be the service to others values and conduct chairman of BOA . For a direct and definite Acceptance of duty to Powers and function of the board compensation, apart from society To prescribe and adopt the rules and regulations to carry expectation of other gain out the act. For the practice of accountancy Regulation of the accountancy profession Supervise the registration, licensure and practice Timeline To administer oaths 1923 – legally recognized as a profession in the To issue, suspend, revoke or reinstate certificate Philippines when Act No. 3105on March 17, 1923 was of registration approved by the 6th Ph. Legislature To adopt official seal 1967 – Accountancy act of 1967 or RA No. 5166 was To prescribe or adopt a code of ethics approved on August 4, 1967 To monitor conditions and adopt measures 1975 – Revised accountancy law or PD No. 692 was To conduct an oversight of audit quality approved on May 5, 1975 As to control 2004 – Philippine Accountancy Act of 2004 or RA 9298 To investigate violation and to issue summons was approved on July 28, 2004 To issue cease and desist order to violators Objectives of RA 9298 To punish for contempt of the board Standardization and regulation of accounting education For educational The examination for registration of CERTIFIED Prepare, adopt, issue or amend the syllabi of the PUBLIC ACCOUNTANT subjects for examination The supervision, control, and regulation of the practice To ensure that all higher accounting educational of accountancy in the Philippines. institution comply with the policies, standards and Note: Organizations that has the primary duty to effectively requirements of the course prescribed by CHED or other enforce or implement the provision of RA 9298 are both the authorized government offices or CPE council PRC and the BOA. To exercise such other powers as may be provided by Scope of practice / Sectors of RA 9298 law which are necessary of incidental to the carrying out of, Commerce and industry (employer – employee the express powers granted to the board to achieve the relationship) objectives and purpose Education or academe (teacher – student relationship) Grounds for suspension or removal of member of the Government (employer (government) – employee board; relationship) 1. Neglect of duty or incompetence Public accountancy ( Client – Service provider 2. Violation or tolerance of any violation of RA9298 and its relationship) IRR Note: 3. FINAL JUDGEMENT of crimes involving moral When the business has an annual revenue of AT LEAST turpitude 10,000, 000 pesos or has a paid-up capital of more than 4. Manipulation or rigging of the CPALE results 5,000,000 pesos, an accounting position or role are required Note: Only Philippine president has the power to remove to be occupied by a duly registered CPA and suspend. The department chair or its equivalent must be duly Examination, Registration and Licensure registered CPA when BSA program is being offered in Qualifications of applicants for CPALE college with other business course 1. Resident of the Philippines Composition and Appointment process 2. Is of a good moral character 3. Is a BS Accountancy degree holder -any person or persons assigned operational responsibility 4. Must not been convicted of any criminal offense for the firm’s system of quality control has sufficient and involving moral turpitude appropriate experience and ability, and the necessary Scope of examination (current in RA 9298) authority, to assume that responsibility 1. AFAR b. relevant ethical requirements 2. Auditing -Independence- which enable the firm to: 3. FAR 1. Communicate its independence requirements to 4. MAS its personnel 5. RFBT 2. Identify and evaluate circumstances and 6. Tax relationships that create threats to independence, and to take Note: Subject to the approval of PRC, may revise or appropriate action or, if considered appropriate, to withdraw exclude subjects and their syllabi, and add new ones as the from the engagement need arises. However, the changes shall not be more often .Shall require: than once every three (3) years. 1. Engagement partners to provide firm with Required ratings relevant info’s about client engagements 1. General average of AT LEAST 75% 2. Personnel to notify firm of threats to 2. There should be no grades lower than 65% independence; so that it can be (i) readily determined, (ii) 3. To be considered as conditional, the MAJORITY of the update records, (iii) take appropriate action subjects should have grades of AT LEAST 75%, provided .atleast annually, shall obtain written confirmation of that the candidates shall take an examination in the compliance with the policies about independence remaining subjects with in two (2) years from the preceding .Establish policies and procedures: examination, provided further that if the candidate fails to 1. Setting out criteria for determining need for obtain AT LEAST GA of 75% and a rating of AT LEAST safeguards to reduce familiarity threat 65% in each of the subjects reexamined, he shall be 2. Requiring the rotation of the engagement partner considered as failed in the entire examination. responsible for the Q.C review Registration of CPA c. Acceptance and continuance of client relationship and 1. Certificate of Registration – primary proof of acceptance specific engagements in the accountancy profession with lifetime validity .Continue where the firm: 2. Professional I.D. – immediate proof being a CPA that is 1. is competent to perform engagement and has renewable every 3 years capabilities 3. Special or temporary permit - for foreign CPA called for 2. can comply with ethical requirements specific purpose, who is engaged as professor, lecturer or 3. has considered the integrity of the client critic, or who is an internationally recognized expert or .Policies requires: specialization 1. obtain such info’s before accepting an engagement with new client QUALITY CONTROL FOR FIRMS THAT PERFORM 2. if there’s potential conflict of interest, AUDITS AND REVIEWS OF FINANCIAL determine whether it is appropriate to accept STATEMENTS, AND OTHER ASSURANCE AND engagement RELATED SERVICES ENGAGEMENTS 3. if issues are identified, firm should document -Engagement quality control review- process designed to how these issues were resolved provide an objective evaluation of the significant judgments .Information haven’t been found earlier which would cause the engagement team made and the conclusions it reached decline of engagement. Policies shall include: in formulating the report. 1. professional and legal responsibilities that apply - Network – A larger structure: to the circumstances (i) That is aimed at cooperation, and 2. possibility of withdrawing from the engagement (ii) That is clearly aimed at profit or cost-sharing or and client relationship shares common ownership, control or management, d. Human resources common quality control policies and procedures, common 1. perform in accordance with professional business strategy, the use of a common brand name, or a standards and regulatory and legal requirements significant part of professional resources. 2. enable firm to issue reports appropriated in the -Professional standards – AASC Engagement Standards, as circumstances defined in the AASC’s Preface to the Philippine Standards -Assignment of engagement teams on Quality Control, Auditing, Review, Other Assurance and .Requiring that: Related Services, and relevant ethical requirements. 1. identity and role of E.P are communicated to *Elements of a System of Q.C key members of client mngt. -creates policies and procedures to address: 2. Has competences, capabilities and authority to a. Leadership responsibilities for quality within the firm perform the role -promote an internal culture recognizing that quality is 3. Responsibilities are clearly defined and essential in performing engagements communicated to the partner. e. engagement performances Difference of Opinion .Includes: -shall establish policies for dealing it 1. matters relevant to promoting consistency in the 1. conclusions reached be documented and quality of engagement performance implemented 2. supervision responsibilities 2. report not be dated until matter is resolved 3. review responsibilities Engagement Documentation -be determined on the basis that work of less experienced -Completion of the Assembly of Final Engagement Files team members is reviewed by more experienced (complete it on a timely basis after reports have been engagement team members. finalized) -Consultation –provide with reasonable assurances that: -Confidentiality, Safe Custody, Integrity, Accessibility, and 1. Appropriate consultation takes place on difficult Retrievability of the Engagement Documentation matter -Retention of Engagement Documentation 2. Sufficient resources are available f. monitoring 3. Nature and scope of, and conclusions are -Monitoring the Firms Q.C Policies and Procedures (must documented and are agreed by both be relevant, adequate and operating effectively) 4. Conclusions from consultations are implemented 1. Include an ongoing consideration and evaluation -Engagement Q.C Review *() of firm’s system of QC, including inspection of one 1. require () for all audits of FS of listed entities completed engagement for each partner 2. Set out criteria which all other audits and reviews 2. Require responsibility for monitoring process to of historical financial info shall be evaluated be assigned to each partner with sufficient knowledge and 3. Require () for all engagements, meeting the experience criteria established 3. Require those performing engagements and -Engagement report should not be dated until the reviewer are not involved in inspecting engagements completion of the () -Evaluating, Communicating and Remedying Identified -Should include: Deficiencies (determine) 1. Discussion of significant matters with 1. Instances that do not necessarily indicate firm’s engagement partner system of Q.C is insufficient to provide it with reasonable 2. Review of the FS or other subject matter info and assurance that it complies with professional standards proposed report 2. Systemic, repetitive or other significant 3. Review of selected engagement documentation deficiencies requiring prompt corrective action relating to significant judgement the team made and the . Shall communicate it to relevant partners and the conclusion it reached recommendations for remedial act (which incudes) 4. Evaluation of conclusion reached 1. Taking appropriate remedial act -Considered the ff: 2. Communication of the findings to those 1. Team’s evaluation of firm’s independence in responsible for training and professional relation to specific engagement development 2. Whether appropriate consultation has taken place 3. Changes to QC policies and procedures on matters involving differences of opinions or other 4. Disciplinary action against those who fail to difficult matters, and conclusions thereof comply, esp. those do so repeatedly. 3. Whether documentation selected for review -Firm shall communicate at least annually the results of the reflects work performed monitoring, including: Criteria for Eligibility of () 1. Description of the monitoring procedures .Through: performed 1. Technical qualifications required to perform the 2. Conclusion drawn role including necessary experience and 3. where relevant, description of systemic, authority repetitive or other significant deficiencies and of the actions 2. Degree to which () can be consulted without taken to resolved it. compromising reviewer’s objectivity -Some firms operate as part of networks and operate under . Maintain objectivity of () common monitoring policies. It shall require: . Shall provide for the replacement of () where reviewer’s 1. Atleast annually, network communicate overall ability may be impaired scope, extent and results of monitoring process to Documentation of () appropriate individuals within network 1. Procedures have been performed 2. communicate any identified deficiencies 2. Review has been completed on or before date -Complaints and Allegations (deals with) of report 1. work performed fails to comply with professional 3. Reviewer is not aware of any unresolved standards and regulatory and legal requirements matters that would cause to believe that 2. non-compliance with firm’s system of QC significant judgement of the team made and . Shall establish clearly defined channels for firm personnel conclusions weren’t appropriate to raise their concerns. -Documentation of the System of QC -have experience with relevant regulatory requirements, or . Require appropriate documentation to provide evidence of ability to gain necessary skills and knowledge effectively operation of each element of its system -sufficient personnel with competence and capabilities . Require retention of documentation for a period of time -experts are available sufficient to permit those perform monitoring procedures to -meeting criteria and eligibility requirements to perform evaluate firms’ compliance engagement Q.C review . requiring documentation of complaints and allegation and -able to complete engagement within reporting deadline. the responses to them. Integrity of client *Application -identity and business reputation of clients owner/mngt -PSQC does not call for compliance with requirements that -nature of operations and business practices are not relevant in circumstances of sole practitioner with -information about attitude of client towards internal control no staff. environment -Documentation and communication of policies for smaller -Whether maintaining firm’s fees as low as possible firms may be less formal and extensive than for larger ones. -indication of inappropriate limitation in scope of work Leadership Responsibilities for quality within the firm -indications that client is involved in money laundering or -Promotion of quality-oriented internal culture depends on other criminal activities clear, consistent and frequent actions and messages from all -reason for proposed appointment of firm and non- levels of firm’s management: reappointment of the previous firm. 1. perform work that complies with professional -identity and business reputation of related parties. standards and regulatory legal requirements *sources of information may include: 2. issue reports appropriated in the circumstances. -Communication with existing or previous servers, and -These actions and messages be communicated (trainings, discussions with other parties seminars, newsletters, memoranda etc.) -Inquiry of personnel and 3rd Parties -Should recognize that firm’s business strategy is subject to -Background searches of relevant databases overriding requirement for firm to achieve quality in all Withdrawal engagement. Internal culture includes: --Discussing appropriate action that firm might take based 1. Establishment of policies that address performance on relevant facts or circumstances evaluation to its personnel -If appropriate to withdraw, discuss the reason for it 2. Assignment of management responsibilities -Consider where legal requirement for firm to remain in 3. Provision of sufficient resources for development and place, or report th withdrawal; together with the reasons for support of Q.C withdrawal, to regulatory authorities Relevant Ethical Requirements -documenting significant matters, consultations, Philippine Ethics Code includes conclusions and basis 1. Integrity Human Resource 2. Objectivity -for recruitment, performance evaluation, capabilities, 3. Professional competence and care competence, career development, promotion, compensation 4. Confidentiality and estimation of personal needs. 5. Professional Behavior Competence- gain through: Professional education, -Reinforced by: professional development, work experience, coaching by 1. Leadership of the firm more experienced staff, independence education 2. Education and training Engagement Teams- consideration of: 3. Monitoring -understanding of, and practical experience with, 4. Process for dealing with non-compliance engagement of similar nature and complexity through Written Confirmation trainings -May be in paper or electronic form - professional standards and regulatory and legal Familiarity threat requirements -nature of engagement, extent to which it involves a matter -Technical knowledge and expertise of public interest -Knowledge of relevant industries -length of service of senior personnel on engagement -Ability to apple professional judgement Considerations specific to public sector audit -understanding of firm’s QC policies. organizations Engagement Performance -Public sector entity is significant for the purpose of -Consistency in Q of E.P (through policies and procedures) expanded Q.C procedures -Supervision (Tracking progress, Considering competence Acceptance and Continuance of Client Relationship and and capabilities, Addressing significant matters arising Specific Engagements during, Identifying matters for consultation by more Competence, Capabilities and Resource experienced team) -Personnel have knowledge of relevant industries or subject -Review matter -Consultation (discussion, documentation) *Engagement Quality Control Review Criteria: *implements to avoid unauthorized alteration or loss of 1. Nature of engagement, including extent of matter engagement documentation may include those that: of public interest • Enable the determination of when and by whom 2. Identification of unusual circumstances or risks in engagement documentation was created, changed or engagement reviewed; 3. Whether laws or regulations require engagement • Protect the integrity of the information at all stages of QC review. the engagement, especially when the information is Nature, Timing and Extent of EQCR shared within the engagement team or transmitted to The engagement report is not dated until the other parties via the Internet; completion of the engagement quality control review. • Prevent unauthorized changes to the engagement However, documentation of the engagement quality documentation; and control review may be completed after the date of the • Allow access to the engagement documentation by the report. engagement team and other authorized parties as Conducting review in a timely manner at necessary to properly discharge their responsibilities. appropriate stage. *Controls that the firm designs and implements to Extent may depend on complexity of maintain the confidentiality: engagement. The performance of EQCR doesn’t reduce • The use of a password among engagement team the responsibilities of the engagement partner. members to restrict access to electronic engagement documentation to authorized users. EQCR of Listed Entity • Appropriate back-up routines for electronic engagement Significant risks identified during the engagement and documentation at appropriate stages during the the responses to those engagement. risks. • Procedures for properly distributing engagement • Judgments made, particularly with respect to materiality documentation to the team members at the start of the and significant risks. engagement, processing it during engagement, and • The significance and disposition of corrected and collating it at the end of engagement. uncorrected misstatements • Procedures for restricting access to, and enabling proper identified during the engagement. distribution and confidential storage of, hardcopy • The matters to be communicated to management and engagement documentation. those charged with *Require engagement teams to: governance and, where applicable, other parties such as • Generate scanned copies that reflect the entire content regulatory bodies. of the original paper documentation, including manual signatures, cross-references and annotations; Criteria for Eligibility of EQCR • Integrate the scanned copies into the engagement files, -Sufficient and Appropriate Technical expertise, including indexing and signing off on the scanned copies experience and authority as necessary; and -consultation with EQCR • Enable the scanned copies to be retrieved and printed as -Objectivity of EQCR necessary Where practicable, is not selected by the -Retention of Engagement Documentation (vary with the engagement partner; nature of engagement and firm’s circumstances) Does not otherwise participate in the engagement *Ordinarily be no shorter than 7yrs from date of auditor’s during the period of review; report Does not make decisions for the engagement -Ownership of engagement documentation (property of the firm, generally) team; and Monitoring Is not subject to other considerations that would Evaluation of the system of QC includes: threaten the reviewer’s objectivity. • Analysis of: Difference of Opinion o New developments in professional standards and -Effective procedures encourage identification of regulatory and legal requirements, and how they are differences of opinion at early stage reflected in the firm’s policies and procedures where -May include consulting another practitioner or firm appropriate; Engagement Documentation o Written confirmation of compliance with -Completion of the Assembly of Final Engagement Files policies and procedures on independence; (may prescribe time limit per each report issued in respect o Continuing professional development, of subject information of an entity.) -Confidentiality, safe custody, integrity, accessibility and including training; and retrievability of engagement documentation o Decisions related to acceptance and continuance of client relationships and specific engagements. • Determination of corrective actions to be taken and improvements to be made in the system, including the provision of feedback into the firm’s policies and procedures relating to education and training. • Communication to appropriate firm personnel of weaknesses identified in the system, in the level of understanding of the system, or compliance with it. • Follow-up by appropriate firm personnel so that necessary modifications are promptly made to the quality control policies and procedures. -Inspection cycle policies may specify cycle that spans Fraud Triangle Theory 3yrs. Depending on the factors such as: -explains the factors that lead to fraud and other unethical • The size of the firm. behavior. • The number and geographical location of offices. Three factors: • The results of previous monitoring procedures. 1. Pressure: can include money problems, debts, • The degree of authority both personnel and offices have addiction and bills. Greed can also be one, but • The nature and complexity of the firm’s practice and it usually needs to be associated with injustice. organization. 2. Opportunity: arises where there is a chance to • The risks associated with the firm’s clients and specific commit act without high chance of getting engagements. caught. Communicating Deficiencies (need not include 3. Rationalization: mindset of a person to commit identification of specific engagement concerned) unethical acts, manages to justify what he is Complaints and allegations about to do. -source- may originate within and outside firm Using the Fraud Triangle -investigation policies and procedures -to analyze the vulnerability to fraud, provides a way • Has sufficient and appropriate experience; to avoid being victimized. • Has authority within the firm; and Relieve pressure- working to relieve these issues can • Is otherwise not involved in the engagement. Documentation of System of QC help prevent criminal behavior -form and content includes: size of firm and number of Minimize opportunity- review internal control and offices, nature and complexity of firm address current or future vulnerabilities. -Appropriate documentation Target Rationalization- shall create zero tolerance • Monitoring procedures, including the procedure for policy towards fraudulent behavior. selecting completed engagements to be inspected. • A record of the evaluation of: Rationalizing Fraud o Adherence to professional standards and -Research shows that individuals who behave regulatory and legal requirements; unethically usually experience guilt or discomfort o Whether the system of quality control has been before committing deviant act, and try to reduce it appropriately designed and effectively implemented; and through rationalization. o Whether the firm’s quality control policies and Thinking Like a Crook- Regulators instruct auditors to procedures have been appropriately applied, so that reports that are issued by the firm or engagement partners pay attention to some factual clues, such as “behavior are appropriate in the circumstances. indicating displeasure or dissatisfaction with the • Identification of the deficiencies noted, an evaluation of company or its treatment of the employee,” without an their effect, and the basis for determining whether and explanation of why and how such clues relate to what further action is necessary. fraudsters’ rationalizations. This same criticism has been leveled at COSO’s Integrated Framework. Principle 8 under the “Risk Assessment” component instructs executives to explicitly consider fraud risk potential and assess rationalization; however, COSO provides few examples of potential fraud rationalizations and does not link them directly with relevant antifraud procedures. AUDITING APPLICATION Taking the risk out of risk assessment
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