• Explain what fraud means.

• Explain the major types of

misstatements.
• Give and explain the elements of
fraud triangle.
• Give and explain the risk factors
contribute to misappropriation of
assets.
• Explain who is primarily responsible
for the prevention and detection of
fraud in a business enterprise.
• Give and explain the risk factors that
contribute to fraudulent financial
reporting.
REPORTERS

GOMEZ,
YULORES, CENETA,
FELICITY
GWENETH STELLA
LYNNE
REPORTERS

IRINCO, MANUMBALI
MORALLOS
JHON , SHAIRA
, MARYJOY
LUIS MAE
 INTRODUCTION
Reporter: Felicity Lynne Gomez
FRAUD
An intentional act
involving the use of
deception that
results in a material
misstatement of the
financial statements.
Intent to deceive is
what distinguishes
fraud from errors.
Auditors routinely
find financial ERRORS
in their client's
books, but those
errors are not
i n t e n t i o n a l .
ERRORS
Are acts of
unintentional
mistake or
negligence.
REPORTER:

GWENETH
YULORES
A misstatement is the difference between the
required amount, classification, presentation,
or disclosure of a financial statement line
item and what is actually reported in order to
achieve a fair presentation, as per the
applicable accounting framework.

Misstatement definition: A misstatement is

an incorrect statement, or the giving of false
information.
 TYPES OF
MISSTATEMENTS

A.Misstatements arising from misappropriation of

assets
B.Misstatements arising from fraudulent financial
reporting.
Misstatements arising from
misappropriation of assets
Asset misappropriation occurs when a
perpetrator steals or misuses an organization’s
asset. Asset misappropriations are the dominant
fraud scheme perpetrated against small
businesses and the perpetrators are usually
employees. Asset misappropriation can be
accomplished in various ways, including
embezzling cash receipts, stealing assets, or
causing the company to pay for goods or services
that were not received.
 Asset
misappropriation
commonly occurs:
•Gain access to cash and
manipulate accounts to cover up
cash thefts.
• manipulate cash disbursement
through fake companies.
• Steal inventory or other assets
and manipulate the financial
records to cover up the fraud.
Misstatements arising from
fraudulent financial reporting
The intentional manipulation of reported financial
results to misstate the economic condition of the
organization is called fraudulent financial reporting.
The perpetrator of such a fraud generally seeks gain
through the rise in stock price and the
commensurate increase in personal wealth.
Sometimes the perpetrator does not seek direct
personal gain, but instead uses the fraudulent
financial reporting to “help” the organization avoid
bankruptcy or to avoid some other negative
financial outcome.
Three common ways in
which fraudulent
financial reporting can
take place include:
1.Manipulation, falsification, or
alteration of accounting records or
supporting documents.
2.Misrepresentation or omission of events,
transactions, or other significant
information.
3.Intentional misapplication of accounting
principles.
ELEMENTS OF FRAUD
TRIANGLE
Reporter: Stella Ceneta
The fraud triangle is a model
that auditors use when explaining
the reasons why a person may
decide to commit a certain fraud.
This framework comprises three
elements that increase the risk
of fraud. They include
rationalization, incentive, and
opportunity.
•Personal factors, such as severe
financial considerations
•Pressure from family, friends, or
the culture to live a more lavish
lifestyle than one's personal
earnings allow for
•Addictions to gambling
or drugs
•Significant related-party transactions.

•A company's industry position, such as the ability

to dictate terms or conditions to suppliers or
customers that might allow individuals to structure
fraudulent transactions.
•Management's inconsistency involves subjective
judgments regarding assets or accounting estimates.

•Simple transactions that are made complex through an

unusual recording process.
•Complex or difficult to understand
transactions, such as financial
derivatives or special-purpose entities.
•Complex or difficult to understand
transactions, such as financial derivatives or
special-purpose entities.

•Ineffective monitoring of management by the board,

either because the board of directors is not
independent or effective, or because there is a
domineering manager.

•Complex or unstable organizational structure.

•weak or nonexistent internal controls.

•Fraud is justified to save a family
member or loved one from the financial
crisis
•We will lose everything (family,
home, car, and so on) if we don't take
the money
•No help is available from outside
•This is "borrowing", and we intend to
pay the stolen money back at some
point
•Something is owed by the company
because others are treated better
•We simply do not care about the
consequences of our actions or of
accepted notions of decency and trust;
we are for ourselves.
Risk Factors Contributory to
Misappropriation of Assets
Reporter: Jhon Luis Irinco
Misappropriation
of Assets
Misappropriation of assets involves
the theft of an entity's assets and is
often perpetrated by employees in
relatively small and immaterial
amounts. However, it can also involve
management who are usually more
able to disguise or conceal
misappropriations in ways that are
difficult to detect.
Misappropriation of assets
can be accompanied in a
variety of ways including:

• Embezzling receipts

• Stealing physical assets

or intellectual property

• Causing an entity to pay

for goods and services not
received

• Using an entity's assets

for personal use
Misappropriation of assets
is often accompanied by
false or misleading records
or documents in order to
conceal the fact that the
assets are missing or have
been pledged without proper
authorization.
A. Misappropriation
B. of Assets
C.
Misappropriation
of Assets A.
B. 1. Personal financial obligations may create
pressure on management or employees with

C. access to cash or other assets susceptible to theft

to misappropriate those assets.
Misappropriation
of Assets A.
B.
2. Adverse relationships between the entity and employees with
access to cash or other assets susceptible to theft may motivate
those employees to misappropriate those assets. For example,
adverse relationships may be created by the following:
(a) Known or anticipated future employee layoffs.

C.
(b) Recent or anticipated changes to employee compensation or
benefit plans.
(c) Promotions, compensation, or other rewards inconsistent with
expectations.
Misappropriation
of Assets B.
C. 1. Certain characteristics or circumstances may increase the
susceptibility of assets to misappropriation. For example, opportunities
to misappropriate assets increase when following situations exist:
(a) large amounts of cash on hand or processed.
(b) inventory items that are small in size, of high value, or in high
demand.
(c) fixed assets which are small in size, marketable, or lacking
observable identification of ownership.
Misappropriation
of Assets B.
C.
2. Inadequate internal control over assets may increase the
susceptibility of misappropriation of those assets. For example,
misappropriation of assets may occur because of the following:
(a) Inadequate segregation of duties or independent checks.
(b) Inadequate oversight of senior management expenditures, such
as travel and other reimbursements.
(c) Inadequate management oversight of employees responsible for
assets, for example, inadequate supervision or monitoring of
remote locations.
Misappropriation
of Assets B.
(d) Inadequate job applicant screening of employees with access to

C. assets.
(e) Inadequate record keeping with respect to assets.
(f) Inadequate system of authorization and approval of transactions
(for example, in purchasing).
(g) Inadequate physical safeguards over cash, investments,
inventory, or fixed assets.
(h) Lack of complete and timely reconciliations of assets.
(i) Lack of timely and appropriate documentation of transactions,
for example, credits for merchandise returns.
Misappropriation
of Assets B.
C. (j) Lack of mandatory vacations for employees performing key
control functions.
(k) Inadequate management understanding of information
technology, which enables information technology employees to
perpetrate a misappropriation.
(l) Inadequate access controls over automated records,
including controls over and review of computer systems event
logs.
 C.
Misappropriation
of Assets

1. Disregard for the need for monitoring or reducing risks related to

1. Disregard for the need for monitoring or reducing risks related
misappropriation of assets.
to misappropriation of assets.
2. Disregard for internal control over misappropriation of assets by
2. Disregard
overriding for controls
existing internal or
control overtomisappropriation
by failing of assets
correct known internal control
by overriding existing controls or by failing to correct known
deficiencies.
3.internal
Behaviorcontrol deficiencies.
indicating displeasure or dissatisfaction with the entity or its
3. Behavior
treatment indicating
of the employee.displeasure or dissatisfaction with the entity
or its treatment of the employee.
Misappropriation
of Assets C.
1. Disregard for the need for monitoring or reducing risks related to
misappropriation of assets.or lifestyle that may indicate assets have
4. Changes in behavior
2.been
Disregard for internal control over misappropriation of assets by
misappropriated.
overriding existing controls or by failing to correct known internal control
5. Tolerance of petty theft.
deficiencies.
3. Behavior indicating displeasure or dissatisfaction with the entity or its
treatment of the employee.
REPORTER:

MANUMBALI,
SHAIRA MAE
 RISK FACTORS
CONTRIBUTORY
TO FRAUDULENT
FINANCIAL
REPORTING
Fraudulent financial reporting may
be accomplished by the following:
 FRAUDULENT
FINANCIAL
REPORTING
Involves intentional
misstatements including omissions
of amounts or disclosures in
financial statements to deceive
financial statement users.
Fraud, whether fraudulent
financial reporting or
misappropriation of assets,
involves incentive or
pressure to commit fraud, a
perceived opportunity to do
so, and some
rationalization of the act
FRAUDULENT FINANCIAL REPORTING

INCENTIVE /
PRESSURE OPPORTUNITIES RATIONALIZATIONS
Incentive or pressure to commit fraudulent
financial reporting may exist when
management is under pressure, from
sources outside or inside the entity, to
achieve an expected (and perhaps
unrealistic) earnings target or financial
outcome – particularly since the
consequences to management for failing to
meet financial goals can be significant.
A perceived opportunity to commit
fraud may exist when an individual
believes internal control can be
overridden, for example, because the
individual is in a position of trust or
has knowledge of specific
deficiencies in internal control.
Fraudulent financial reporting often involves
management override of controls that otherwise
may appear to be operating effectively. Fraud
can be committed by management overriding
controls using such techniques as:
•Recording fictitious journal entries.
•Inappropriately adjusting assumptions and changing judgments
used to estimate account balances.
•Omitting, advancing, or delaying recognition
•Concealing or not disclosing
•Engaging in a complex transaction that is structured to
misrepresent the financial position or financial performance of
the entity.
•Altering records and terms.
Individuals may be able to rationalize
committing a fraudulent act. Some
individuals possess an attitude, character, or
set of ethical values that allow them
knowingly and intentionally to commit a
dishonest act. However, even otherwise
honest individuals can commit fraud in an
environment that imposes sufficient
pressure on them.
Reporter: Maryjoy
Morallos
The prevention and
detection of fraud rest
with both those charged
with governance of the
entity and
management.
Responsibility for the
prevention and
detection of fraud
involves a commitment
to creating a culture of
honesty and ethical
behavior.
Those charged with governance
consider the potential override
of controls or other
inappropriate influence over the
financial reporting process,
such as efforts by management
to manage earnings in order to
influence the perceptions of
analysts as to the entity's
performance and profitability.
THANK
YOU!