DQ5 Assignment: 

SAS No. 99 (AU 316) “Consideration of Fraud in a Financial Statement Audit”

1. What are the three components of the fraud triangle? 
Incentives/Pressures, Opportunities and Attitudes/Rationalization 
2.  List three examples of incentives for management to misstate earnings. 
 Decreasing customer demand and increasing business failures in developing new products
among the whole market
 Company makes significant operating loss and it will lead to bankruptcy and going concern
problems in future
 Management can not meet the requirement of the third party, such as significant investors
and creditors
3.  List three examples of factors that increase the opportunity for management to misstate
earnings.  
 Significant unusual and complex transaction closed to the period end
 Significant transaction between related party and it is hard to trace and be audit
 There is no effective and useful oversight management to their employees
4.  Why is a brainstorming session required under SAS No. 99?  Which engagement personnel
should be involved in the brainstorming session?
All the key member in audit team should be involved in the brainstorming session.
Brainstorming session is an appropriate communication among the auditing engagement team
and it can help auditors to exchange ideas about the potential material misstatement in financial
statement due to fraud. This discussion enable auditors to have clear guideline, everyone in the
same page and keep professional skepticism in mind.
5.  What is the role of analytical procedures in fraud detection?  When should the analytical procedures
be performed (i.e. prior to the brainstorming session, prior to audit planning, as substantive testing, as
wrap-up at the end of the audit)?
Analytical procedures should be performed in audit planning. Analytical procedures can help
auditors to identify the existence of unusual transactions and event, or amount and number that
matter to financial statement and generate material misstatement due to fraud.
6.  Once a fraud risk assessment has been made, how should the auditors use this input in planning the
audit?  
7.  Which audit area(s) should always be considered a high risk for fraudulent activity? 
Revenue recognition, quantities of the inventory and management estimates
8.  Who are the auditors required to communicate with if fraud is detected?  
Auditors are required to communicate with management and those who charged with governance
9.  What audit procedures are recommended to detect management override? 
Auditors should obtain the understanding of the entity’s general entries reporting process and the
controls over the adjustment and journal entries. Meanwhile, they need to test specific entries and other
adjustment and determine the timing of test. Besides, auditors need to inquiry the individuals who
involved in the unusual transaction and who have the authority to record and modify the general
entries. ‘
 Examine the journal entries and other adjustments
 Review accounting estimate for biased