AUDITORS REPONSIBILITY

OF DETECTING FRAUD
 SAS NO. 99 CONSIDERATION OF FRAUD
IN A FINANCIAL STATEMENT AUDIT
1. Description and Characteristics of Audit
2. Professional Skepticism

3. Engagement Personnel Discussion

4. Obtaining Audit Evidence and Information

5. Identifying Risk

6. Assessing the Identified Risk

7 Responding to the Assessment

8.
Evaluating Audit Evidence and Information

9. Communicating Possible Fraud

10. Documenting Consideration of Fraud

Auditor assess risk factors related to:

1. Fraudulent Financial Reporting

2. Misappropriation of Assets
1. Fraudulent Financial Reporting
o Managements Characteristics and
Influence over the Control Environment

o Industry Conditions

o Operating Characteristics and financial

Stability
Financial Fraud Common Schemes:
Improper Revenue Recognition

Improper Treatment of Sales

Improper Asset Valuation

Improper Deferral of Costs and Expenses

Improper Recording of Liabilities

Inadequate Disclosures
2. Misappropriation of Assets
o Susceptibility of Assets to Misappropriation

o Controls
Asset Misappropriation Common Schemes:
Personal Purchases

Ghost Employees

Fictitious Expenses

Altered Payee

Pass- through Vendors

Theft of Cash/ Inventory

Lapping
Auditor's Response to Assessed Risk

Auditors judgment about the risk of material misstatements due to

fraud may affect the audit in the following ways:

Engagement staffing and extent of supervision

Professional skepticism
Nature, Timing, and extend of Procedures Performed
Response to Detected Misstatements Due to Fraud

1. Currently planned audit procedures are sufficient to respond to

risk factors

2. Extend the audit and modify planned procedures

3. Procedures cannot be sufficiently modified to address the risk

Fraud exist but has NO material effect on FS, Auditor
should:

Refer the matter to an appropriate level of management at least

one level above those involved
Be satisfied that implications for other aspects of the audit have
been adequately considered
Fraud exist and HAS material effect on FS or auditor
is unable to evaluate degree of materiality, auditor
should:

Consider the implications for other aspects of the audit

Discuss the matter with senior management and with a BODs
audit committee
Attempt to determine whether the fraud is material
Suggest that the client consult with legal counsel, if appropriate
FRAUD DETECTION
TECHNIQUES
Three Common Fraud Schemes:
1. Payments to Fictitious Vendors

2. Payroll fraud

3. Lapping Accounts Receivable

 1. Payments to Fictitious Vendors

Sequential Invoice ACL to sort the records of the invoice file

Numbers by invoice number and vendor number

ACLs expression builder, create filter to

Vendors w/ P.O. Boxes select the vendor records from the invoice
file that uses P.O. Boxes Address

ACL to join the employee file and the

Vendors w/ Employee invoice file using the address fields as the
Addresses common key for both files

ACL duplicates command to generate

Multiple Company w/ a listing of mailing addresses that are
the same Address common to two or more vendors

Invoice Amount Slightly

ACLs expression builder, create a value
below the Review range around the control threshold
Threshold
 2. Payroll Fraud

Overpayment Payments to
of employees nonexistent
employees

ACLs join feature to link

payroll and employee files
using Employee No. as
common attribute
Excessive Duplicate
Hours Worked Payments

ACLs expression builder ACLs duplicates function to

select payroll records search records of employees
that reflects excessive (same name, same employee
hours worked no., same mailing address, etc.)
 3. Lapping Accounts Receivable

1. Balance Forward Method

2. Open Invoice Method

Example: Customer A remits a check for Php 5,325.50 in payment of an
open invoice for the same amount. The perpetrator pockets the check
but does not close the invoice. Therefore, the invoice balance is
carried forward. In the next period, Customer B remits a check for Php
10,550.00 in full payment of an open invoice. The embezzler applies
Php 5,325.50 of this payment to Customer As oopen invoice, thus
closing it. The remainder of Php 5,224.50 is applied to Customer Bs
invoice, which remains open. The balance of Php 5,325.50 is carried
forward into the next period.
 3. Lapping Accounts Receivable

2. Open Invoice Method

Sales Invoice File
Invoice Customer Invoice Sales Due Closed Remittance
Number Number Amount Date Date Date Amount
77885 27345 10,550 02/12/17 02/25/17 03/28/17 5,224.50