A3 - Fraud Risks

Question 1

what are the types of fraud?

Answer 1

• Fraudulent financial reporting (lying): involve intentional misstatement or omissions of amounts or disclosures in FS. usually acts of management
• Misappropriation of assets (stealing): involve theft of entity’s assets. usually involve one or more individuals amount management, employees, or third parties
• Corruption = cheating

Question 2

what are the 3 fraud risk factors?

Answer 2

1. Incentives/pressures: a reason to commit fraud
2. Opportunity: a lack of effective controls
3. Rationalization/Attitude = ethics/integrity: an attempt to justify fraudulent behaviors

Question 3

when are analytical procedures required?

Answer 3

• Planning stage
• Final review stage

Question 4

what are the 4 attribute of risks?

Answer 4

1. Types of risks
2. Significance of risks: can it lead to a material misstatement?
3. Likelihood of risks: how likely is this going to happen?
4. Pervasiveness of the risk: does it affect the FS as a whole or only specific accounts, transactions, or assertions?

Question 5

what are the 2 presumptions of risk in every audit?

Answer 5

1. Improper revenue recognition - required to do analytical procedures
2. Management override of controls

Question 6

what are the 3 levels of required responses to fraud risk assessment?

Answer 6

1. Overall, general response: assign personnel, supervision, evaluate management’s selection and application of accounting principles, UNPREDICTABILITY in the selection of auditing procedures
2. Response encompassing specific audit procedures: altering the NET
3. Response addressing risks related to management override: obtain understanding of financial reporting, examine JEs and other adjustments, review accounting estimates for biases, evaluate significant unusual transactions

If fraud risks are significant = withdraw

Question 7

what are the conditions suggest the possibility of fraud?

Answer 7

• Discrepancies of accounting records
• Conflict or missing evidential matter
• Objections by management to the auditor meeting privately with audit committee
• Accounting policies that appear inconsistent with industry practice
• Frequently changes in accounting estimates
• Tolerance of violations of company’s code of conduct

Question 8

How to report fraud?

Answer 8

• if fraud that causes by lower level employees => report/discuss with senior management
• If fraud involves senior management => report directly to those with governance

It’s not auditor’s responsibility to report fraud to outside parties, but it’s auditor’s duty to disclose to outside parties if:
+ to comply with legal and regulatory requirements, such as on form 8-K
+ to successor auditor when successor makes inquiries of the predecessor
+ to response to a subpoena
+ to a funding agency when required

Question 9

what is the primary objective of the fraud brainstorming session?

Answer 9

to assess the potential for material misstatement due to fraud