Beruflich Dokumente
Kultur Dokumente
Fraud Auditing
Review Questions
11-1
Fraudulent financial reporting is an intentional misstatement or omission
of amounts or disclosures with the intent to deceive users. Two examples of
fraudulent financial reporting are accelerating the timing of recording sales revenue
to increased reported sales and earnings, and recording expenses as fixed assets
to increase earnings.
11-2
Misappropriation of assets is fraud that involves theft of an entitys assets.
Two examples are an accounts payable clerk issuing payments to a fictitious
company controlled by the clerk, and a sales clerk failing to record a sale and
pocketing the cash receipts.
11-3
Fraudulent financial reporting is an intentional misstatement or omission
of amounts or disclosures with the intent to deceive users, while misappropriation
of assets is fraud that involves theft of an entitys assets. Frauds involving
financial reporting are usually larger than frauds involving misappropriation of
assets, usually involve top management, and do not directly involve theft of
company assets.
11-4
The three conditions of fraud referred to as the fraud triangle are (1)
Incentives/Pressures; (2) Opportunities; and (3) Attitudes/Rationalization. Incentives/
Pressures are incentives of management or other employees to commit fraud.
Opportunities are circumstances that allow management or employees to commit
fraud. Attitudes/Rationalization are indications that an attitude, character, or set
of ethical values exist that allow management or employees to commit a dishonest
act or they are in an environment that imposes sufficient pressure that causes
them to rationalize committing a dishonest act.
11.5 The following are example of risk factors for fraudulent financial reporting
for each of the three fraud conditions:
11-1
11-6
The following are example of risk factors for misappropriation of assets
for each of the three fraud conditions:
11-7
Auditors use several sources to gather information about fraud risks,
including:
11-8
SAS 99 requires the audit team to conduct discussions to share insights
from more experienced audit team members and to brainstorm ideas that
address the following:
1.
How and where they believe the entitys financial statements might
be susceptible to material misstatement due to fraud. This should
include consideration of known external and internal factors affecting
the entity that might
11-2
11-8 (continued)
2.
3.
4.
11-9
Auditors must inquire whether management has knowledge of any fraud
or suspected fraud within the company. SAS 99 also requires auditors to inquire
of the audit committee about its views of the risks of fraud and whether the audit
committee has knowledge of any fraud or suspected fraud. If the entity has an
internal audit function, the auditor should inquire about internal audits views of
fraud risks and whether they have performed any procedures to identify or detect
fraud during the year. SAS 99 further requires the auditor to make inquiries of
others within the entity whose duties lie outside the normal financial reporting
lines of responsibility about the existence or suspicion of fraud.
11-10 The corporate code of conduct establishes the tone at the top of the
importance of honesty and integrity and can also provide more specific guidance
about permitted and prohibited behavior. Examples of items typically addressed
in a code of conduct include expectations of general employee conduct,
restrictions on conflicts of interest, and limitations on relationships with clients
and suppliers.
11-11 Management and the board of directors are responsible for setting the tone
at the top for ethical behavior in the company. It is important for management to
behave with honesty and integrity because this reinforces the importance of
these values to employees throughout the organization.
11-12 Management has primary responsibility to design and implement antifraud
programs and controls to prevent, deter, and detect fraud. The audit committee
has primary responsibility to oversee the organizations financial reporting and
internal control processes and to provide oversight of managements fraud risk
assessment process and antifraud programs and controls.
11-13 The three auditor responses to fraud are: (1) change the overall conduct
of the audit to respond to identified fraud risks; (2) design and perform audit
procedures to address identified risks; and (3) perform procedures to address the
risk of management override of controls.
11-14 Auditors are required to take three actions to address potential management
override of controls: (1) examine journal entries and other adjustments for evidence
of possible misstatements due to fraud; (2) review accounting estimates for
biases; and (3) evaluate the business rationale for significant unusual transactions.
11-3
11-15 Three main techniques use to manipulate revenue include: (1) recording
of fictitious revenue; (2) premature revenue recognition including techniques
such as bill-and-hold sales and channel stuffing; and (3) manipulation of
adjustments to revenue such as sales returns and allowance and other contra
accounts.
11-16 The handling of cash by individuals operating cash registers is particularly
susceptible to theft. The notice your meal is free if we fail to give you a receipt
is designed to ensure that every customer is given a receipt and all sales are
entered into the register, establish accountability for the sale.
11-17 The three types of inquiry are informational, assessment, and interrogative.
Auditors use informational inquiry to obtain information about facts and details
that the auditor does not have. For example, if the auditor suspects financial
statement fraud involving improper revenue recognition, the auditor may inquire
of management as to revenue recognition policies. The auditor uses assessment
inquiry to corroborate or contradict prior information. In the previous example, the
auditor may attempt to corroborate the information obtained from management
by making assessment inquiries of individuals in accounts receivable and
shipping. Interrogative inquiry is used to determine if the interviewee is being
deceptive or purposefully omitting disclosure of key knowledge of facts, events,
or circumstances. For example, a senior member of the audit team might make
interrogative inquiries of management or other personnel about key elements of
the fraud where earlier responses were contradictory or evasive.
11-18 When making inquiries of a deceitful individual, three examples of verbal
cues are frequent rephrasing of the question, filler terms such as well or to tell
the truth, and forgetfulness or acknowledgements of nervousness. Three examples
of nonverbal cues by the individual are creating physical barriers by blocking their
mouth, leaning away from the auditor, and signs of stress such as sweating or
fidgeting.
11-19 When the auditor suspects that fraud may be present, SAS 99 requires
the auditor to obtain additional evidence to determine whether material fraud has
occurred. SAS 99 also requires the auditor to consider the implications for other
aspects of the audit. When the auditor determines that fraud may be present,
SAS 99 requires the auditor to discuss the matter and audit approach for further
investigation with an appropriate level of management that is at least one level
above those involved, and with senior management and the audit committee,
even if the matter might be considered inconsequential. For public company
auditors, the discovery of fraud of any magnitude by senior management is at
least a significant deficiency and may be a material weakness in internal control
over financial reporting. This includes fraud by senior management that results in
even immaterial misstatements. If the public company auditor decides the fraud
is a material weakness, the auditors report on internal control over financial
reporting will contain an adverse opinion.
11-4
a.
(3)
b.
(4)
11-21
a.
(1)
b.
(4)
11-22
a.
(1)
b.
(1)
c.
(1)
c.
(1)
d.
(2)
FRAUD CONDITION
1.
Incentives/Pressures
2.
Opportunities
3.
4.
5.
Attitudes/Rationalization
6.
Incentives/Pressures
11-24
a.
b.
Incentives/Pressures
Opportunities
11-5
11-24 (continued)
c.
d.
11-25
a.
DEFICIENCY
RECOMMENDATION
1.
2.
There is no segregation of
duties between persons
responsible for collecting
admission fees and persons
responsible for authorizing
admission.
3.
4.
5.
6.
11-6
11-25 (continued)
DEFICIENCY
RECOMMENDATION
7.
8.
b.
c.
11-26
1.
2.
a.
b.
c.
3.
a.
b.
c.
4.
a.
b.
c.
Error.
Internal verification of invoice preparation and posting by an
independent person.
Test clerical accuracy of sales invoices.
Fraud.
The prelisting of cash receipts should be compared to the
postings in the accounts receivable master file and to the
validated bank deposit slip.
Trace cash received from prelisting to cash receipts journal.
Confirm accounts receivable.
Error.
Use of prenumbered bills of lading that are periodically
accounted for.
Trace a sequence of prenumbered bills of lading to recorded
sales transactions. Confirm accounts receivable at year-end.
Error.
No merchandise may leave the plant without the preparation
of a prenumbered bill of lading.
Trace credit entries in the perpetual inventory records to bills
of lading and the sales journal. Confirm accounts receivable
at year-end.
11-7
11-26 (continued)
5.
a.
b.
c.
6.
a.
b.
c.
7.
a.
b.
c.
8.
a.
b.
c.
11-27
a.
b.
Error.
Internal review and verification of account classification by
an independent person.
Test accuracy of invoice classification.
Error.
Online sales are supported by shipping documents and
approved online customer orders.
Trace sales journal or listing entries to supporting documents
for online sales, including sales invoices, shipping documents,
sale orders, and customer orders.
Error.
Sales invoices are prenumbered, properly accounted for in
the sales journal, and a notation on the invoice is made of
entry into the sales journal.
Account for numerical sequence of invoices recorded in the
sales journal, watching for duplicates. Confirm accounts
receivable at year-end.
Fraud.
All payments from customers should be in the form of a check
payable to the company. Monthly statements should be sent
to all customers.
Trace from recorded sales transactions to cash receipts for
those sales; confirm accounts receivable balances at yearend.
11-8
11-27 (continued)
c.
d.
11-28
a.
DEFICIENCIES
LIKELY MISSTATEMENTS
1.
2.
3.
4.
5.
6.
11-28 (continued)
11-9
11-29
b.
a.
The auditor must conduct the audit to detect errors and fraud,
including embezzlement, that are material to the financial statements.
It is more difficult to discover embezzlements than most types of
errors, but the auditor still has significant responsibility. In this
situation, the deficiencies in internal control are such that it should
alert the auditor to the potential for fraud. On the other hand, the
fraud may be immaterial and therefore not be of major concern.
The auditor of a public company must also consider the impact of
noted deficiencies when issuing the auditors report on internal
control over financial reporting. When noted deficiencies are
considered to be material weaknesses, whether individually or
combined with other deficiencies, the auditors report must be
modified to reflect the presence of material weaknesses.
b.
c.
11-10
11-30
a.
a.
FRAUD?
1.
Yes
2.
Yes
Misappropriation of assets
3.
Yes
4.
Yes
Misappropriation of assets
5.
Yes
6.
Yes
Misappropriation of assets
7.
No *
N/A
11-31
1.
a.
b.
c.
2.
a.
b.
c.
3.
b.
TYPE OF FRAUD
a.
b.
c.
11-11
11-31 (continued)
4.
a.
b.
c.
5.
a.
b.
c.
6.
a.
b.
c.
Case
11-32
a.
There are many fraud risk factors indicated in the dialogue. Among
the fraud risk factors are the following:
11-12
11-32 (continued)
b.
Kent states that the auditor does not have specific duties
regarding fraud. In fact, an auditor has a responsibility to
specifically assess the risk of material misstatement due to
fraud and to consider that assessment in designing the audit
procedures to be performed.
Kent does not think that Mints forecast for 2010 has an effect
on the financial statement audit for 2009. However, Kent
should consider the possibility that Mint may intentionally
misstate the 2009 ending balances to increase the reported
profit in 2010.
Kent believes the audit programs are fine as is. Actually, Kent
should modify the audit programs because of the many risk
factors that are present in the SCS audit.
11-13
11-32 (continued)
c.
11-14
Page
1
Produced with ACL
INV.DATE
INVNO
10/21/2002
87
10/21/2002
22
04/09/2002
d.
e.
f.
04/10/2009
14:10:33
by: ACL Educational Edition - Not For Commercial Use
PRODNO
QUANTITY VENDOR_NO
INVOICE_AMT UNIT_COST
090584072
41
11475
7125.80
173.80
090585322
29
11837
3996.20
137.80
090081001
3
10134
467.40
155.80
73
11589.40
467.40
The three vendors with the largest total dollars for 2002 were: vendor
#s 10025, 11475, and 12130. (Summarize by vendor number, then
Quick Sort to find the largest three.)
The following amounts are over $15,000: vendor #10025 for
$56,767.20, vendor #11475 for $20,386.19, and vendor #12130 for
$15,444.80. [Filter used is (VENDOR_NO = 10025 OR
VENDOR_NO = 11475 OR VENDOR_NO = 12130) AND
INVOICE_AMOUNT > 15000.]
See the following printout. (Filter, then print report). Total transactions
for vendor #10134 = $22.618.62. (Edit filter to include only vendor
#10134 and use Total command)
Page
1
04/10/2009
15:45:19
Produced with ACL by: ACL Educational Edition - Not For Commercial Use
INV._DATE
INV._NO PRODNO QTY VENDOR_NO INVOICE_AMOUNT UNITCOST
09/29/2002
11/12/2002
04/09/2002
09/30/2002
02/14/2002
10/15/200255
030303343
0302303
090081001
010551340
052484405
060102096
100
458
3
278
115
286
1240
11-15
10134
10134
10134
10134
10134
13440
883.00
18883.34
467.40
1823.68
561.20
11068.20
8.83
41.23
155.80
6.56
4.88
38.70
33686.82
256.00
2.
(Note: Internet problems address current issues using Internet sources. Because
Internet sites are subject to change, Internet problems and solutions may change. Current
information on Internet problems is available at www.pearsonhighered.com/arens.)
11-16