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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.
Copyright © 2014 Pearson Education11-3
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.
Copyright © 2014 Pearson Education
Define fraud and distinguishbetween fraudulent financial
reporting and misappropriation ofassets.
11-4
11
Copyright © 2014 Pearson Education11-5
Management Fraud
Fraudulent financial reporting
Misappropriation of assets
Copyright © 2014 Pearson Education
Describe the fraud triangle and identify conditions for fraud.
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Copyright © 2014 Pearson Education11-9
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
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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
Copyright © 2014 Pearson Education11-11
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
Copyright © 2014 Pearson Education11-12
Incentives/Pressures:
Personal financial obligations create pressureto misappropriate assets
Adverse relationships between managementand employees motivate employees tomisappropriate assets
Copyright © 2014 Pearson Education11-13
Opportunities:
There is a presence of large amounts of cashon hand or inventory items
There is an inadequate internal control overassets
Copyright © 2014 Pearson Education11-14
Attitudes/Rationalization:
Disregard for the need to monitor or reducerisk of misappropriating assets exists
There is a disregard for internal controls
Copyright © 2014 Pearson Education
Understand the auditor’s responsibility for assessing the risk of fraud and detecting
material misstatements due to fraud.
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33
Copyright © 2014 Pearson Education11-16
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.”
Copyright © 2014 Pearson Education11-18
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
Copyright © 2014 Pearson Education
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
Copyright © 2014 Pearson Education11-21
Organizational code of conduct
General employee conduct
Conflicts of interest
Outside activities, employment, and directorships
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Relationships with clients and suppliers
Gifts, entertainment, and favors
Kickbacks and secret commissions
Organization funds and other assets
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Organization records and communications
Dealing with outside people and organizations
Prompt communications
Privacy and confidentiality
Copyright © 2014 Pearson Education11-26
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.
Copyright © 2014 Pearson Education
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
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Copyright
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.