CH 11 Fraud

Fraud Auditing
Chapter 11
Types of Fraud
Fraudulent financial reporting
Misappropriation of assets
The Fraud Triangle
Incentives/Pressures
Opportunities Attitudes/Rationalization
Examples of Risks Factors for
Fraudulent Reporting
Financial stability or profitability is threatened by
economic, industry, or entity operating conditions.
Excessive pressure exists for management to
meet debt requirements.
Personal net worth is materially threatened.
There are significant accounting estimates that
are difficult to verify.
There is ineffective oversight over financial
reporting.
High turnover or ineffective accounting internal
Audit staff.
Little communication and support of the
entitys core values is evident.
A history of violations of laws is known.
Management has a practice of making
overly aggressive or unrealistic forecasts.
Misappropriation of Assets
Personal financial obligations create pressure to
misappropriate assets.
Adverse relationships between management
and employees motivate employees to
misappropriate assets.
There is a presence of large amounts of cash
on hand or inventory items.
There is an inadequate internal control over
assets.
Disregard for the need to monitor or reduce
risk of misappropriating assets exists.
There is a disregard for internal controls.
Assessing the Risk of Fraud
SAS 99 provides guidance to auditors
in assessing the risk of fraud.
Professional Skepticism
SAS 1 states that, in exercising professional
skepticism, an auditor neither assumes that
management is dishonest nor assumes
unquestioned honesty.
Sources of Information Gathered
to Assess Fraud Risks
Communication
among audit team
Inquiries of
management
Risk
factors
Analytical
procedures
Other
information
Identified risks of material misstatements due to fraud
Identify corporate governance
and other control environment
factors that reduce fraud risks.
Corporate Governance Oversight
to Reduce Fraud Risks
1. Create and maintain a culture of honesty
and high ethics.
2. Evaluate fraud risks and implement programs
and controls to mitigate identified fraud risks.
3. Develop an appropriate fraud oversight process.
Example Elements for a Code of
Conduct
Organizational code of conduct
General employee conduct
Conflicts of interest
Outside activities, employment, and directorships
Conduct
Relationships with clients and suppliers
Gifts, entertainment, and favors
Kickbacks and secret commissions
Organization funds and other assets
Conduct
Organization records and communications
Dealing with outside people and organizations
Prompt communications
Privacy and confidentiality
Organizational Factors
Contributing to Risk of Fraud
2003 1998 1994
Collusion between
employees and
third parties
Inadequate
internal
controls
Management
override of
internal controls
48
31
33
39
58
59
31
36
36
Organizational Factors
Contributing to Risk of Fraud
Collusion between
employees and
management
Lack of control
over management
be directors
Ineffective or
nonexistent ethics or
compliance program
15
19
23
12
11
6
10
8
7
2003 1998 1994
Learning Objective 5
Develop responses to identified
fraud risks.
Responding to the Risk of Fraud
Change the overall conduct of the audit
to respond to identified fraud risks.
Design and perform audit procedures
to address identified risks.
Design and perform procedures to
address the risk of management
override of controls.
Specific Fraud Risk Areas
Inventory fraud risks
Revenue and accounts receivable fraud risks
Purchases and accounts payable fraud risks
Methods of Uncovering Fraud
2003 1998 1994
Internal controls
Internal audit
Notification
by employee
77%
51%
52%
65%
43%
47%
63%
58%
51%
2003 1998 1994
Accident
Anonymous tip
Notification
by customer
54%
37%
28%
41%
35%
26%
34%
41%
34%
2003 1998 1994
Notification by
regulatory or law
enforcement agency
Notification
by vendor
External audit
19%
16%
8%
16%
11%
15%
12%
4%
5%
Responding to Misstatements that
May be the Result of Fraud
When fraud is suspected,
the auditor gathers
additional information
to determine whether
fraud actually exists.
End of Chapter 11

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Fraud Auditing

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