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Chapter 4:
Fraud and Error
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Part 4 objectives
Distinguishes fraud and error and describe2 types of fraud that relevant to the auditor;
Describes the responsibilities of
management of the entity and auditors forfraud and error
Procedures when there is an indicate that
Fraud & Error may exit Reporting of Fraud & Error
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Fraud and error
Misstatement in FSs arise from fraud and
error
The reactions of auditor to misstatement
caused by fraud and error are different
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Error
Error: refers to an unintentional
misstatement in FSs, including the omission
of an amount or a disclosure, such as:
A mistake in gathering or processing datafrom which FSs are prepared.
An incorrect accounting estimate arisingfrom oversight or misinterpretation of facts.
A mistake in the application of accountingprinciples relating to measurement,
recognition, classification, presentation or
disclosure.
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Fraud
Fraud: refers to an intentional actby one or
more individuals among management,
those charged with governance, employees,
or third parties, involving the use of
deception to obtain an unjust or illegaladvantage
Fraud involving management is referred to
as management fraud;
Fraud involving only employees of entity
is referred to employee fraud
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Fraud
2 types of Fraud
- Fraudulent Financial reporting
- Misappropriation of assets
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Fraud- Fraudulent Financial Reporting
Involves intention misstatements including
omissions of amounts or disclosures in
financial statements to deceive financial
statement users
- Manipulation accounting records or
supporting documentation from which FS
are prepared.
- Misrepresentation in events, transactions or
other significant info.
- Intentional misapplication of acc principles
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Fraud- Fraudulent Financial Reporting
Involves management override (khng
nghe theo) of controls that otherwise may
appear to be operating effectively.
Cause from:
- Management earning;
- Pressures and incentives: pressures to meet
market expectations or a desire to
maximize compensation based on
performance
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Fraud- Misappropriation of assets
Misappropriation (s tham ) of assetsinvolves the theft of an entitys assets andis often perpetrated ( gy ra) by employees
in relatively small and immaterial (vn vt)amounts.
E.g.:
- Embezzling (bin th, tham ) receipts
- Stealing physical assets;
- Using an entitys assets for personal use
- .
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Responsibilities of those Charged wit
Governance and of Management
The responsibility for the prevention,
detection and handling of fraud and error
through the implementation and continuedoperation ofadequate accounting and
internal control systems.
Because of the inherent limitations of the
accounting and internal control systems, it
is impossible to eliminate the possibility of
fraud and error.
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Responsibilities of the Auditor and th
Audit Firm
The auditor and the audit firm are to assist
the client entity in detecting, handling and
deterring fraud and error;
The auditor and the audit firm are not and
cannot be held responsible for theprevention of fraud and error in the client
entity.
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Inherent Limitations of an Audit
Owing to the inherent limitations of an
audit, there is an unavoidable risk that
some material misstatements of thefinancial statements will not be detected,
even though the audit is properly planned
and performed in accordance with ISAs.
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Inherent Limitations of an Audit
the use of judgment;
the use of testing;
the inherent limitations of internal control; the audit evidence available to the auditor
is persuasive rather than conclusive in
nature.
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Inherent Limitations of an Audit
The risk of not detecting a material
misstatement resulting from fraud is higher
than the risk of not detecting a materialmisstatement resulting from error
the risk of the auditor not detecting a
material misstatement resulting from
management fraud is greater than for
employee fraud
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Inherent Limitations of an Audit-
Professional Skepticism
Professional Skepticism??
The auditor should maintain an attitude of
professional skepticism throughout theaudit, recognizing the possibility that a
material misstatement due to fraud could
exist, notwithstanding the auditors pastexperience with the entity about the
honesty and integrity of management and
those charged with governance.
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Procedures when there is an indicatio
that Fraud or Error May Exist
If the auditor and the audit firm believe the
indicated fraud or error could have a
material effect on the FS
shouldperform appropriate modified or additional
procedures (thc hin quy trnh bsung/thm)
Discuss the matter with management in
case that additional procedures are not
dispelled the auditor suspicion.
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Reporting of Fraud and Error
To the Director, in cases:
- the auditor suspects fraud may exist, even if
the potential effect on the financial
statements has not been measured;
- fraud is found to exist; or
- significant error is found to exist.
Often, report the matter to a level in theorganization structure of the entity above
that responsible for the persons believed to
be implicated
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Reporting of Fraud and Error
To Regulatory and Enforcement (s pbuc) Authorities:
- When frauds are raised as to the
involvement of the highest authority
- Confidential requirement
the auditor and the audit firm may need to
seek legal advice in advance in such
circumstances
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Reporting of Fraud and Error
To users of the Audit Report on the
Financial Statements :
- Which audit report is prepared?