FRAUD RISK ASSESSMENT

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2. 3. Introduction to Fraud Risk Assessment. Objectives:Understand the magnitude of fraud.Understand the characteristics of fraud.Understand the auditor\'s and management\'s responsibility with respect to fraud.Understand the fraud risk assessment process.. 4. Discussion Leader Notes. Refer to paragraphs 100.1-100.6 of this Guide for more information. .
FRAUD RISK ASSESSMENT

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1. 1 FRAUD RISK ASSESSMENT SAS No. 99 and Related Guidance

2. 2

3. 3 Introduction to Fraud Risk Assessment Objectives: Understand the magnitude of fraud. Understand the characteristics of fraud. Understand the auditor?s and management?s responsibility with respect to fraud. Understand the fraud risk assessment process.

4. 4 Discussion Leader Notes Refer to paragraphs 100.1-100.6 of this Guide for more information.

5. 5 Introductory Thoughts Fraud is by far the most common cause of liability claims against auditors, both in terms of frequency and severity. SAS No. 99 provides guidance regarding the auditor?s consideration of fraud. SAS No. 99 does not change the auditor?s responsibility for fraud detection. SAS No. 99 does provide guidance and requirements for the purpose of improving auditor performance in identifying and responding to fraud risks.

6. 6 Discussion Leader Notes Refer to paragraphs 100.7-100.9 of this Guide for more information. EXHIBIT 1-1 presents CAMICO Mutual Insurance Company?s audit claims history.

7. 7 Audit Claims by Type of Loss

8. 8 Discussion Leader Notes Refer to paragraphs 100.17-100.18 of this Guide for more information.

9. 9 Background SAS No. 99, Consideration of Fraud in a Financial Statement Audit. Supersedes SAS No. 82. First step in AICPA?s Antifraud and Corporate Responsibilities Program, which is designed to restore investor confidence in the accounting industry. www.aicpa.org/antifraud Effective for Calendar 2003/Fiscal 2004 audits.

10. 10 Discussion Leader Notes Refer to paragraphs 100.19-100.25 of this Guide for more information.

11. 11 Major Provisions of SAS No. 99 Auditor responsibility for fraud detection unchanged. Emphasize the importance of professional skepticism. Gather information to identify fraud risks. Focus on fraud risks and responses. Respond to identified fraud risks: Overall responses. Specific responses. Management override of controls. Document the consideration of fraud.

12. 12 Discussion Leader Notes Refer to paragraphs 101.1-101.6 of this Guide for more information.

13. 13 An Introduction to Fraud What is fraud? An intentional act that results in material misstatement of the financial statements. Who commits fraud? Usually older than other criminals. Often married with stable family situations. Above average education. Types of misstatements caused by fraud: Misstatements resulting from fraudulent financial reporting. Misstatements resulting from misappropriation of assets.

14. 14 Discussion Leader Notes Refer to paragraphs 101.7-101.16 of this Guide for more information.

15. 15 Fraudulent Financial Reporting Stages: Misstatement. Concealment. Financial statements misstated as a result of: Misapplication of GAAP involving measurement and resulting in misstatement of amounts. Omission or misrepresentation about transactions or events. Recording fictitious transactions (transactions that don?t exist). Recording sham transactions (transactions that lack substance).

16. 16 Discussion Leader Notes Refer to paragraphs 101.17-101. 20 of this Guide for more information.

17. 17 Misappropriation of Assets Stages: Misstatement. Concealment. Conversion. Opportunity to commit and conceal exist only when: Assets are susceptible to misappropriation. There is a lack of antifraud programs and controls to prevent or detect it.

18. 18 Discussion Leader Notes Refer to paragraphs 101.21-101.25 of this Guide for more information.

19. 19 Other Fraud Considerations Off-the-books versus on-the-books fraud. Off-the-books schemes, such as kickbacks or skimming cash sales, do not involve a documentary trail or manipulation of the company?s books. On-the-books schemes may relate to either misappropriation of assets or fraudulent financial reporting. Information technology and fraud. Automated systems are used to generate false documents or manipulate accounting records to affect or conceal the fraud.

20. 20 Discussion Leader Notes Refer to paragraphs 101.26-101.43 of this Guide for more information.

21. 21 Other Fraud Considerations (cont.) Fraud conditions (the fraud triangle): Incentives/pressures to commit fraud. Opportunities to commit fraud. Attitudes/rationalizations. Other characteristics of fraud: Management override of controls. Concealment. Collusion. Falsifying documents or records.

22. 22 Discussion Leader Notes Refer to section 102 of this Guide for more information.

23. 23 Responsibility for Fraud Detection Auditor?s responsibility for fraud detection. To obtain reasonable assurance that the financial statements are free of material misstatement, whether caused by error or fraud. Management?s responsibility for fraud detection. Management is responsible for designing and implementing company programs and controls to prevent, deter, and detect fraud. Exercising professional skepticism. Immaterial misstatements caused by fraud. The expectation gap.

24. 24 Discussion Leader Notes Refer to paragraphs 102.12-102.13 of this Guide for more information. EXHIBIT 1-2 presents some commonly held jury perceptions about auditors? responsibilities.

25. 25 What Does the Jury Think?

26. 26 Discussion Leader Notes Refer to paragraphs 103.1-103.2 of this Guide for more information.

27. 27 SAS No. 99 Fraud Risk Assessment Process Hold a discussion among engagement team members to consider the susceptibility of the client?s financial statements to material misstatement due to fraud. Obtain other information needed to identify risks of material misstatement due to fraud. Identify risks that may result in material misstatement of the financial statements due to fraud. Assess the identified risks after taking into account an evaluation of the company?s antifraud programs and internal controls. Respond to the results of the risk assessment.

28. 28 Discussion Leader Notes Refer to paragraphs 103.3-103.5 of this Guide for more information. Appendix 1A is a roadmap to the PPC approach to fraud risk assessment. (Refer participants to PM-1 in their participant materials. Explain that the PPC forms will be discussed and illustrated throughout the course.)

29. 29 PPC Approach to Fraud Risk Assessment Step 1?Gather information about the entity and its environment that may be relevant in identifying risks of material misstatement of the financial statements due to fraud. Step 2?Synthesize the information gathered into potential fraud risks. Step 3?Identify risks that could result in material misstatement of the financial statements due to fraud. Step 4?Assess the identified risks and determine whether an audit response is required. Step 5?Develop appropriate responses to risks of material misstatement of the financial statements due to fraud.

30. 30 Discussion Leader Notes Refer to paragraphs 103.6-103.7 of this Guide for more information. End of Part 1 and Chapter 1 text.

31. 31 Other Considerations Other SAS No. 99 requirements: Evaluate audit evidence. Make certain communications. Where do we go from here? Form an implementation team. Provide training to audit staff. Implement fraud risk assessment. Form a best practices team. Make client presentations. Conduct ongoing staff training and awareness.

32. 32

33. 33 Gathering Information Needed to Identify Fraud Risks Objective: To understand the information gathering step in the fraud risk assessment process.

34. 34 Discussion Leader Notes Refer to section 200 of this Guide for more information.

35. 35 Step 1?Gather Information to Identify Fraud Risks Discussion among engagement team members. Inquiries of management and others. Considering whether fraud risk factors are present. Preliminary analytical procedures related to revenue. Other procedures.

36. 36 Discussion Leader Notes Refer to paragraphs 201.1-201.2 of this Guide for more information. Each of these are discussed in the following slides.

37. 37 Engagement Team Discussion Consider: What should be discussed? How should the discussion be conducted? When should the discussion occur? Who should participate in the discussion?

38. 38 Discussion Leader Notes Refer to paragraphs 201.3-201.16 of this Guide for more information. In exercising professional skepticism, point out that the team should ? Maintain a questioning mind. Be continually alert for indications that fraud may have occurred. Thoroughly probe issues. Obtain additional evidence or corroboration when necessary. Communicate with other team members (or experts as necessary) continuously throughout the audit. Suspend belief in management?s honesty and integrity. Insist on no less than persuasive evidence. EXHIBIT 2-3 illustrates examples of fraudulent financial reporting. EXHIBIT 2-4 illustrates examples of misappropriation of assets.

39. 39 What Should Be Discussed? Importance of maintaining an appropriate attitude of professional skepticism throughout the audit. How and where the company?s financial statements might be susceptible to material misstatement due to fraud. How management could perpetrate and conceal fraudulent financial reporting. How the company?s assets could be misappropriated.

40. 40 Discussion Leader Notes Refer to paragraphs 201.17-201.24 of this Guide for more information. EXHIBIT 2-2 provides example engagement team discussion questions. (Refer participants to PM-2 in their participant materials.) Ask them if these are the types of things being thought about during their brainstorming sessions. Share best practices.

41. 41 What Should Be Discussed? (cont.) External and internal factors that might create incentives/pressures, provide opportunities, or enable rationalization of fraud. Nature and risk of management override of controls. How the team might respond to the susceptibility of the client?s financial statements to material misstatement due to fraud.

42. 42 Discussion Leader Notes Refer to paragraphs 201.25-201.32 of this Guide for more information.

43. 43 How Should the Discussion Be Conducted? Should be an open exchange of ideas, or brainstorming. Should occur with an attitude of professional skepticism. Should be a discussion, not a one-sided communication. Preferably in-person. Partner involvement required.

44. 44 Discussion Leader Notes Refer to paragraphs 201.33-201.52 of this Guide for more information. EXHIBIT 2-5 presents some guidelines for brainstorming. EXHIBIT 2-6 presents some ?what if? scenarios. (Refer participants to PM-3 in their participant materials.) Ask them if they put themselves in the client?s shoes during their brainstorming sessions. Share best practices.

45. 45 How Should the Discussion Be Conducted? (cont.) Be prepared. Helpful to use ?what if? scenarios. Think like the client. If I were the client, what would I do and how would I do it? Take notes. Use effective brainstorming techniques: Don?t criticize or evaluate. Be enthusiastic. Welcome creativity. Stay focused on the topic. Build on other people?s ideas. Go for quantity, not quality. No discussion. All participants are equal.

46. 46 Discussion Leader Notes Refer to paragraphs 201.53-201.55 of this Guide for more information.

47. 47 When Should the Discussion Occur? Prior to, or in conjunction with, information gathering. For ongoing engagements, generally recommend before gathering other information. For initial engagements, probably after. Will vary by firm. Communication should continue throughout the audit.

48. 48 Discussion Leader Notes Refer to paragraphs 201.56-201.57 of this Guide for more information.

49. 49 Who Should Participate in the Discussion? Auditor with final responsibility for the audit (partner). Key members of the engagement team. Consider including specialists. Sole practitioners can brainstorm on their own.

50. 50 Discussion Leader Notes Refer to paragraphs 201.58-201.64 of this Guide for more information. Review the structure and format of the ?Fraud Risk Discussion among Engagement Team Members? form (CX-5a or RX-4a). (Refer participants to PM-4 or PM-5 in their participant materials.) Discuss any issues they?ve had filling out the forms.

51. 51 Documenting the Discussion How and when discussion occurred. Team members who participated. Subject matter discussed. Discard brainstorming notes. Using the PPC approach: Use ?Fraud Risk Discussion among Engagement Team Members? (CX-5a or RX-4a) or document in a memo. Carry forward relevant information to the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) for further consideration in identifying fraud risks.

52. 52 Discussion Leader Notes Exercise 1 Objective: To conduct a mock engagement team discussion, document that discussion, and determine what, if any, relevant information should be carried forward to the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) for further consideration. Discussion leader preparation: Select at least one actual firm audit engagement that class participants are familiar with for use in the mock team discussion. Divide the class into groups. Each group should spend 10 minutes brainstorming about the client, with the person most familiar with the client acting as the engagement partner. One person should take notes. Once the discussion is complete, each group should take another 5 minutes to complete the Course Handout, ?Engagement Team Discussion,? and to determine whether there is any relevant information to be carried forward to the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) for further consideration. Each group should then share the results of their discussion with the class.

53. 53 Exercise 1-Engagement Team Discussion Objective: To conduct a mock engagement team discussion, document that discussion, and determine what, if any, relevant information should be carried forward to the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) for further consideration. Use the Course Handout, ?Engagement Team Discussion.?

54. 54 Discussion Leader Notes Refer to paragraphs 202.1-202.5 of this Guide for more information. Each of these are discussed in the following slides.

55. 55 Inquiries of Management and Others SAS No. 99 requires the auditor to inquire of : Management. Audit committee. Internal auditors. Other employees.

56. 56 Discussion Leader Notes Refer to paragraphs 202.6-202.9 of this Guide for more information. EXHIBIT 2-7 presents example inquiries of management about fraud risks. (Refer participants to PM-6 in their participant materials.) Ask for other examples from their experience that they would like to share as best practices.

57. 57 Management Inquiries Knowledge of fraud or suspected fraud. Awareness of any allegations of fraud. Understanding of company?s risks of fraud. How the importance of ethical behavior is communicated to employees. Company programs and controls to address fraud risks. Susceptibility of operating locations to fraud. Programs and controls related to fraud reported to audit committee.

58. 58 Discussion Leader Notes Refer to paragraphs 202.10-202.12 of this Guide for more information.

59. 59 Audit Committee Inquiries Views about company risks of fraud. Knowledge of actual or suspected instances of fraud. Audit committee role in overseeing company?s fraud risk assessment and monitoring process.

60. 60 Discussion Leader Notes Refer to paragraph 202.13 of this Guide for more information.

61. 61 Internal Auditor Inquiries Views about company risks of fraud. Knowledge of actual or suspected fraud. Performance of procedures to identify or detect fraud. Management?s response to any findings.

62. 62 Discussion Leader Notes Refer to paragraphs 202.14-202.20 of this Guide for more information. Ask the class to share 1) best practices for selecting individuals to interview and 2) the questions they use. Record the best practices on a flip-chart. EXHIBIT 2-8 presents example inquiries of other company employees. (Refer participants to PM-7 in their participant materials.) Compare the class results with the participant materials.

63. 63 Inquiries of Other Employees Inquire of other employees about awareness or suspicion of fraud. Consider making inquiries of: Employees with varying levels of authority. Employees outside of the accounting department. Operating personnel. Employees involved in initiating, recording, or processing complex or unusual transactions or in high risk audit areas. Employees in areas vulnerable to fraud. Employees with key roles in internal control. Employees referred by other interviewees. In-house legal counsel.

64. 64 Discussion Leader Notes Refer to paragraphs 202.21-202.39 of this Guide for more information. EXHIBIT 2-9 presents some guidelines for effective interviews. EXHIBIT 2-10 presents verbal and nonverbal clues to deception.

65. 65 Effective Interviewing Review information gathered before making inquiries. Make inquiries in an environment that is free from distractions. Interview people one-on-one. Take notes if desired. Use effective interviewing techniques. Be alert for verbal and nonverbal clues to deception. Manage your nonverbal communication.

66. 66 Discussion Leader Notes Refer to paragraphs 202.21-202.39 of this Guide for more information. Ask participants to share their own best practices.

67. 67 Best Practices for Interviews Put the interviewee at ease. Tell them why you?re asking. Ask open-ended questions. Listen without interrupting. Tailor questions to the company, industry, and individual. Ask good follow-up questions. Avoid accounting jargon (defalcations, irregularities, misappropriation). Don?t read your questions. Paraphrase their responses.

68. 68 Discussion Leader Notes Refer to paragraphs 202.40-202.44 of this Guide for more information. Review the structure and format of the ?Inquiries of Management and Others about the Risks of Fraud? form (CX-5b or RX-4b). (Refer participants to PM-8 or PM-9 in their participant materials.) Discuss any issues they?ve had filling out the forms.

69. 69 Documenting the Inquiries SAS No. 99 requires auditors to document the performance of inquiry procedures. Extent is a matter of professional judgment. Discard any notes taken once inquiries are documented. Using the PPC approach: Use ?Inquiries of Management and Others about the Risks of Fraud? (CX-5b or RX-4b) or document in a memo. Carry forward relevant information to the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) for further consideration in identifying fraud risks.

70. 70 Discussion Leader Notes Exercise 2 Objective: To improve interviewing skills by conducting a mock interview and receiving/providing constructive feedback. Divide the class into groups of three. Each group should spend five minutes conducting a mock interview, with the least experienced member of the team interviewing, the most experienced member being interviewed, and the third member observing (taking notes using the Course Handout.) Let the interviewees choose their positions in the company (CFO, controller, bookkeeper, etc.) and the type of client/industry. Give the interviewer a few minutes to prepare. After five minutes, ask the observer to provide constructive feedback within the group (what went well, what didn?t, and why). Have each group share with the class what they learned. For new staff training, bring in experienced staff members to act as interviewees.

71. 71 Exercise 2?Mock Interview Objective: To improve interviewing skills by conducting a mock interview and receiving/providing constructive feedback. Use the Course Handout, ?Improving Interviewing Skills.?

72. 72 Discussion Leader Notes Refer to paragraphs 203.1-203.3 of this Guide for more information. Each of these are discussed in the following slides.

73. 73 Fraud Risk Factors What are fraud risk factors? Incentives/pressures. Opportunities. Attitudes/rationalizations. Tailoring fraud risk factors. Considering whether fraud risk factors are present. Documenting the consideration of fraud risk factors.

74. 74 Discussion Leader Notes Refer to paragraphs 203.4-203.14 of this Guide for more information.

75. 75 What Are Fraud Risk Factors? Events or conditions that indicate the presence of: Incentives or pressures to commit fraud. Opportunities to carry out the fraud. Attitudes/rationalizations to justify the fraud. Classified in SAS No. 99 as relating to: Fraudulent financial reporting. Misappropriation of assets.

76. 76 Discussion Leader Notes Refer to paragraphs 203.5-203.7 of this Guide for more information.

77. 77 Incentives/Pressures Fraudulent financial reporting: Adverse economic, industry, or operating conditions. Pressures to meet third-party expectations. Conditions that threaten management?s personal net worth. Pressures to meet financial targets set by management. Misappropriation of assets: Personal financial obligations that create pressure on individuals with access to assets. Adverse relationship between company and employees with access to assets.

78. 78 Discussion Leader Notes Refer to paragraphs 203.8-203.11 of this Guide for more information.

79. 79 Opportunities Fraudulent financial reporting: Nature of industry or operations. Complex or unstable organizational structure. Internal control deficiencies. Misappropriation of assets: Assets susceptible to theft. Internal control deficiencies.

80. 80 Discussion Leader Notes Refer to paragraphs 203.12-203.15 of this Guide for more information. EXHIBIT 2-11 presents example fraud risk factors related to fraudulent financial reporting. EXHIBT 2-12 presents example fraud risk factors related to misappropriation of assets.

81. 81 Attitudes/Rationalizations Common rationalizations for both types of fraud: I am only borrowing the money. Nobody will get hurt. The company treats me unfairly. It?s for a good purpose. It?s only temporary. Employees are depending on us to protect their jobs.

82. 82 Discussion Leader Notes Refer to paragraphs 203.16-203.23 of this Guide for more information. EXHIBIT 2-13 presents fraud risk factors for certain specialized industries.

83. 83 Tailoring Fraud Risk Factors Characteristics of an entity that may influence the consideration of fraud risk factors and require tailoring include: Size of entity. Ownership characteristics. Specialized industry considerations.

84. 84 Discussion Leader Notes Refer to paragraphs 203.24-203.42 of this Guide for more information. Exhibit 2-14 presents common pressures that motivate misappropriation of assets.

85. 85 Considering Whether Fraud Risk Factors Are Present Required to consider whether risk factors exist based on knowledge of company. Apply professional judgment. Whether ?present and should be considered? in identifying fraud risks. Note modifying language (e.g., ?inappropriate,? ?unduly?). Don?t consider significance or mitigating controls too early in the process.

86. 86 Discussion Leader Notes Refer to paragraphs 203.43-203.45 of this Guide for more information. Review the structure and format of the ?Considering Whether Fraud Risk Factors Are Present? form (CX-5c or RX-4c). (Refer participants to PM-10 or PM-11 in their participant materials.) Discuss any issues they?ve had filling out the forms.

87. 87 Documenting the Consideration of Fraud Risk Factors SAS No. 99 only requires the auditor to document consideration of the existence of fraud risk factors. Extent of documentation is a matter of professional judgment. Using the PPC approach: Use ?Considering Whether Fraud Risk Factors Are Present? Form (CX-5c or RX-4c). Carry forward relevant information to the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) for further consideration in identifying risks.

88. 88 Discussion Leader Notes Refer to paragraphs 204.1-204.2 of this Guide for more information. Each of these will be discussed in the following slides.

89. 89 Considering Results of Preliminary Analytics Performing preliminary analytical procedures. Preliminary analytical procedures related to revenue. Documenting preliminary analytical procedures.

90. 90 Discussion Leader Notes Refer to paragraphs 204.3-204.11 of this Guide for more information. EXHIBIT 2-15 presents some common financial statement trends.

91. 91 Performing Preliminary Analytics Preliminary analytical procedures should be applied in all audits to assist in planning. Use of particular analytical procedures is not required. Key to effective use is to identify absence of expected relationships or presence of unexpected relationships. SAS No. 99 requires preliminary analytical procedures to be performed related to revenue.

92. 92 Discussion Leader Notes Refer to paragraphs 204.12-204.19 of this Guide for more information.

93. 93 Preliminary Analytical Procedures Related to Revenue To identify unusual or unexpected relationships that may indicate improper revenue recognition. Procedures that may be useful include: Analysis of relationships between financial and nonfinancial amounts. Trend analysis. Ratio analysis. Budgetary comparison. Perform disaggregated analysis: By month. By location. By product line.

94. 94 Discussion Leader Notes Refer to paragraphs 204.20-204.22 of this Guide for more information.

95. 95 Documenting Preliminary Analytical Procedures If no significant fluctuations identified, documentation may be a sign-off on the audit program. Recommend documenting preliminary analytical procedures related to revenue. Using the PPC approach: Carry forward unusual or unexpected relationships that may indicate improper revenue recognition to the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) for further consideration in identifying fraud risks.

96. 96 Discussion Leader Notes Refer to paragraphs 205.1-205.21 of this Guide for more information.

97. 97 Considering Other Information Acceptance and continuance. Obtaining an understanding of the company. Including internal control, audit risk factors, and inherent risk. Other information. Including reviews of interim financial statements, if any.

98. 98 Discussion Leader Notes Refer to paragraphs 205.22-205.23 of this Guide for more information. End of Part 2 and Chapter 2 text.

99. 99 Documenting the Consideration of Other Information SAS No. 99 only requires auditor to document consideration of other information. Extent of documentation is a matter of professional judgment. Using the PPC approach: Acceptance and continuance??Engagement Acceptance Form? (CX-1 or RX-1) or ?Engagement Continuance Form? (CX-1a or RX-1a). Obtaining an understanding??Audit Planning Form? (CX-3) or ?Risk Identification and Planning Form? (RX-3). Carry forward relevant information to the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) for further consideration in identifying risks.

100. 100

101. 101 Identifying and Assessing Fraud Risks Objectives: Understand the synthesis process. Understand how to identify risks that could result in material misstatement. Understand how to assess the identified risks. Understand how to determine whether an audit response is necessary.

102. 102 Discussion Leader Notes Refer to paragraphs 301.1-301.4 of this Guide for more information. Each of these will be discussed in the following slides.

103. 103 Step 2?Synthesize Information Gathered Accumulate information gathered that may be relevant for identifying potential fraud risks so it can be evaluated together. Synthesize information gathered into potential fraud risks.

104. 104 Discussion Leader Notes Refer to paragraphs 301.5-301.8 of this Guide for more information. Examples 3-1 and 3-2 illustrate how potential fraud risks can be missed if all relevant information is not accumulated.

105. 105 Accumulating Information Gathered Discussion among engagement team members. Inquiries of management and others. Considering whether fraud risk factors are present. Preliminary analytical procedures. Other procedures.

106. 106 Discussion Leader Notes Refer to paragraphs 301.5-301.8 of this Guide for more information.

107. 107 Documenting Information Accumulated No requirement to document information accumulated. Using the PPC approach: Document information accumulated in Column 1 of the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4).

108. 108 Discussion Leader Notes Refer to paragraphs 301.9-301.22 of this Guide for more information. EXHIBIT 3-2 presents a visual presentation of the synthesis process. EXHIBIT 3-3 provides a list of questions auditors can ask as part of the synthesis process to identify potential risks. Examples 3-3 through 3-8 illustrate considering the type of risk, the pervasiveness of the risk, and observed fraud conditions.

109. 109 Synthesizing Information Why is synthesis important? Helps to recognize how information gathered, alone or in combination, could indicate where fraud might occur. Helps to articulate circumstances as potential fraud risks. Often not a one-to-one relationship between pieces of information gathered and potential fraud risks. Synthesis considerations: Type of risk (misappropriation of assets or fraudulent financial reporting). Pervasiveness. Fraud conditions (incentives/pressures, opportunity, attitudes/rationalizations).

110. 110 Discussion Leader Notes Refer to paragraphs 301.23-301.24 of this Guide for more information. EXHIBIT 3-4 presents examples of potential fraud risks articulated as a result of the synthesis process. EXHIBIT 3-5 provides examples of how information from various sources may be synthesized.

111. 111 Synthesizing Information (cont.) Articulating potential fraud risks. Output of the synthesis process. Consider in terms of what could go wrong with the financial statements. Be specific when describing. Attempt to define whether risk is of over- or understatement.

112. 112 Discussion Leader Notes Refer to paragraphs 301.25-301.28 of this Guide for more information. Review the structure and format of Columns 1 through 3 of the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4). (Refer participants to PM-12 or PM-13 in their participant materials.) Discuss any issues they?ve had filling out Columns 1 through 3 of the Fraud Risk Table.

113. 113 Documenting the Synthesis Process No requirement to document the synthesis process, only to identify fraud risks. Using the PPC approach: Document potential risks in Column 3 of the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4).

114. 114 Discussion Leader Notes Exercise 3 Objective: To synthesize information accumulated on the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) to identify potential fraud risks. This exercise is based on the case study in section 301 of this Guide. Divide the class into groups. Instruct each group to spend 10 minutes using the Course Handout, ?The Synthesis Process,? to consider the information accumulated and articulate potential fraud risks. The potential fraud risks should be documented in Column 3 of the Fraud Risk Table. Use the Course Handout appropriate for the firm?s audit approach (i.e., CX-5 or RX-4). Remind the class that there is not a one-to-one relationship between information gathered and potential fraud risks. The synthesis process helps auditors recognize how pieces of information, alone or in combination, could indicate a potential fraud risk. Each group should share with the class their potential fraud risks documented in Column 3. Encourage class discussion about any differences among groups. Paragraphs 301.29-301.34 and Appendix 3A present the authors? suggested potential risks. However, they are only suggestions, and there are no right or wrong answers. Review Appendix 3A with the participants.

115. 115 Exercise 3 - Synthesis Objective: To synthesize information accumulated on the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4) to identify potential fraud risks. Use the Course Handout, ?The Synthesis Process.?

116. 116 Discussion Leader Notes Refer to paragraphs 302.1-302.8 of this Guide for more information. Examples 3-9 through 3-11 illustrate considering significance and likelihood.

117. 117 Step 3?Identify Risks of Material Misstatement Due to Fraud Significance. Whether risk is of a magnitude that could result in material misstatement of the financial statements. Likelihood. Probability that the risk could result in a material misstatement. Question is not whether fraud is likely to occur, but rather whether the fraud, if it occurred, is likely to result in material misstatement. Fraud conditions. Incentives/pressures. Opportunities. Attitudes/rationalizations.

118. 118 Discussion Leader Notes Refer to paragraphs 302.9-302.17 of this Guide for more information. Examples 3-12 and 3-13 illustrate identifying risks of material misstatement.

119. 119 Identifying Risks of Material Misstatement (cont.) Other considerations: Size of the entity. Complexity of the entity. Ownership attributes. Presumption that improper revenue recognition is a fraud risk. Ordinarily presume that improper revenue recognition is a fraud risk. To not identify as a fraud risk, the presumption must be overcome.

120. 120 Discussion Leader Notes Refer to paragraph 302.18 of this Guide for more information.

121. 121 Identifying Risks of Material Misstatement (cont.) Risk of management override of controls. Always presumed to be a possibility that management override could occur. Always an identified fraud risk, and auditors are always required to perform procedures to respond to the risk.

122. 122 Discussion Leader Notes Refer to paragraphs 302.19-302.23 of this Guide for more information. Review the structure and format of Column 4 of the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4). (Refer participants to PM-12 or PM-13 in their participant materials.) Discuss any issues they?ve had filling out Column 4 of the Fraud Risk Table. Point out the section of CX-5 or RX-4 used for documenting the reasons supporting a conclusion that improper revenue recognition is not a fraud risk. Ask participants if they have any questions about this requirement.

123. 123 Documenting Identified Fraud Risks SAS No. 99 requires auditors to document risks of material misstatement due to fraud (identified fraud risks). If improper revenue recognition is not identified as a fraud risk, SAS No. 99 requires documentation of the reasons supporting that conclusion. Using the PPC approach: Document identified fraud risks in Column 4 of the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4). If revenue recognition not identified, document reasons supporting conclusion at the appropriate place in the ?Fraud Risk Assessment Form? (CX-5) or ?Fraud Risk Identification Form? (RX-4).

124. 124 Discussion Leader Notes Refer to paragraphs 303.1-303.16 of this Guide for more information. SAS No. 99 does not change the overall audit risk assessment process in SAS No. 47, Audit Risk and Materiality in Conducting an Audit.

125. 125 Step 4?Assess Fraud Risks, Determine Need for Responses Evaluate whether antifraud programs and controls have been suitably designed and placed in operation. Not required to obtain a further understanding of controls beyond that necessary to plan the audit. Assess whether identified fraud risks: Are adequately mitigated and, therefore, do not require an additional audit response. Require an audit response.

126. 126 Discussion Leader Notes Refer to paragraphs 303.17-303.21 of this Guide for more information. Review the structure and format of Column 5 of the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5). (Refer participants to PM-12 in their participant materials.) Discuss any issues they?ve had filling out Column 5 of the Fraud Risk Table. Review the structure and format of Steps 1 and 3 of the ?Risk Assessment Summary Form? (RX-5) for risk-based audits. (Refer participants to PM-14 in their participant materials.) Discuss any issues they?ve had filling out Step 1 or Step 3 (?Risk of Material Misstatement? section) related to fraud risks.

127. 127 Documenting the Assessment of Identified Fraud Risks Document the specific risks of material misstatement due to fraud that were identified and a description of the auditor?s responses to those risks. No specific documentation related to the process is required. Using the PPC approach: Document whether identified risks require an audit response in Column 5 of the Fraud Risk Table in the ?Fraud Risk Assessment Form? (CX-5). Document the auditor?s assessment of risks and effect on the audit approach using the ?Risk Assessment Summary Form? (RX-5) for risk-based audits.

128. 128 Discussion Leader Notes Refer to paragraphs 304.2-304.17 of this Guide for more information. EXHIBIT 3-7 provides example factors to consider in assessing the effectiveness of the control environment.

129. 129 Evaluating Programs and Controls Obtaining an understanding of programs and controls. Auditors required to consider understanding of internal control in the context of how it addresses identified fraud risks. Control environment controls. Set the tone of a company and influence the control consciousness of its people.

130. 130 Discussion Leader Notes Refer to paragraphs 304.18-304.26 of this Guide for more information. EXHIBIT 3-8 presents example factors to consider in assessing the effectiveness of risk assessment. EXHIBIT 3-9 presents example factors to consider in assessing the effectiveness of communication.

131. 131 Evaluating Programs and Controls (cont.) Risk assessment controls. Set objectives; prioritize and link those objectives; and identify, analyze, and manage risks relevant to those objectives. Communication controls. Provide a clear understanding of financial reporting and safeguarding controls, how the controls work, and the responsibilities of individuals within the company related to those controls.

132. 132 Discussion Leader Notes Refer to paragraphs 304.27-304.39 of this Guide for more information. EXHIBIT 3-10 presents example factors to consider in assessing the effectiveness of monitoring activities. End of Part 3 and Chapter 3 text.

133. 133 Evaluating Programs and Controls (cont.) Monitoring controls. Assess the quality of a company?s internal control over time and involve assessing the design and operation of controls on a timely basis and taking actions as necessary. Control activities. Policies and procedures that help ensure management directives are carried out. Should mitigate the company?s risks relating to financial reporting and safeguarding of assets.

134. 134 Discussion Leader Notes Exercise 4 Objective: To identify which (if any) potential fraud risks represent risks of material misstatement due to fraud and to determine whether an audit response is required. This exercise is based on the case studies in sections 302 and 303 of this Guide. Have the class read PM-15, ?Participant Materials?Exercise 4, Plas-Cup Case Study,? and review the Course Handout, ?Identifying and Assessing Fraud Risks? to become familiar with the potential risks in Column 3. Use the Course Handout appropriate for the firm?s audit approach (i.e., CX-5 or RX-4/RX-5). Divide the class into small groups. Each group should spend 10 minutes to determine, based on the client information provided, whether any of the potential risks in Column 3 of the Fraud Risk Table in the Course Handout, ?Identifying and Assessing Fraud Risks,? represent risks of material misstatement due to fraud (Column 4). If using CX-5 to identify fraud risks, the group should then determine if the risks in Column 4 are mitigated or require an audit response (Column 5). If using RX-4 to identify fraud risks, the group should then assess risks of material misstatement using RX-5. Each group should share their identified fraud risks (Column 4) and whether they require responses with the class. Encourage class discussion about any differences among groups. Paragraphs 302.24-302.29 and 303.22-303.25 and Appendixes 3A and 4A-2 present the authors? suggested solutions. However, they are only suggestions and there are no right or wrong answers.

135. 135 Exercise 4-Identifying and Assessing Fraud Risks Objective: To identify which (if any) potential fraud risks represent risks of material misstatement due to fraud and to determine whether an audit response is required. Use Course Handout, ?Identifying and Assessing Fraud Risks.?

136. 136

137. 137 Responding to Fraud Risks Objectives: Understand the types of responses to identified fraud risks. Understand how to develop appropriate responses to identified fraud risks. Understand how to link responses with identified fraud risks.

138. 138 Discussion Leader Notes Refer to paragraphs 400.4-400.7 of this Guide for more information. Each of these will be discussed in the following slides.

139. 139 Step 5?Develop Responses to Identified Fraud Risks Auditors generally respond to fraud risks in three ways: Overall responses. Specific responses. Responses to further address management override of controls. Developing responses can be broken down into decision-making steps.

140. 140 Discussion Leader Notes Refer to paragraphs 400.8-400.12 of this Guide for more information.

141. 141 Steps to Developing Responses Step 1: Consider the nature of identified fraud risks. Step 2: Consider responding to fraud risks using overall responses. (Certain overall responses are required.) Step 3: Consider whether other specific responses are necessary to address identified fraud risks. Step 4: Consider the procedures performed to address the risk of management override of controls. Step 5: Consider whether the combination of overall and specific responses planned for the engagement is adequate to respond to identified fraud risks. You may conclude that the approach already developed for the audit is effective.

142. 142 Discussion Leader Notes Refer to paragraphs 400.13-400.19 of this Guide for more information.

143. 143 Other Considerations When Responding to Fraud Risks Consider the reliability of audit evidence. Exercise professional skepticism. Link risks to responses. If you can?t address the risks, consider the need to withdraw from the engagement.

144. 144 Discussion Leader Notes Refer to paragraphs 401.1-401.8 of this Guide for more information. Each of these will be discussed in the following slides. EXHIBIT 4-2 presents examples of overall responses. EXHIBIT 4-3 illustrates linking overall responses with identified risks. (Refer participants to PM-16 in their participant materials.)

145. 145 Overall Responses What are overall responses? Responses that affect the way the way the audit is conducted. SAS No. 99 requires certain overall responses. Other overall responses as considered necessary to respond to identified risks. Required overall responses. Staffing and supervision. Selection and application of accounting principles. Incorporating an element of unpredictability. Other overall responses.

146. 146 Discussion Leader Notes Refer to paragraphs 401.9-401.20 of this Guide for more information.

147. 147 Staffing and Supervision Assign more experienced audit personnel or increase supervision. Assign personnel with industry or functional expertise. Consider involving outside specialists.

148. 148 Discussion Leader Notes Refer to paragraphs 401.21-401.40 of this Guide for more information. EXHIBIT 4-4 presents questions to consider when evaluating accounting principles.

149. 149 Selection and Application of Accounting Principles Characteristics of accounting principles: Representational faithfulness. Verifiability. Neutrality. Consistency. Identify significant accounting policies. Consider client selection and application of accounting principles.

150. 150 Discussion Leader Notes Refer to paragraphs 401.41-401.45 of this Guide for more information.

151. 151 Incorporating an Element of Unpredictability Alter the timing of tests. Change the sampling methods. Perform procedures at different locations or on an unannounced basis. Perform a different combination of analytical procedures and substantive tests of details. Test account balances and assertions otherwise considered immaterial or low risk.

152. 152 Discussion Leader Notes Refer to paragraph 401.46 of this Guide for more information.

153. 153 Other Overall Responses Increased sensitivity to the nature, timing, and extent of documentation. Increased recognition of the need to corroborate client explanations. Further consideration of the auditor?s control risk assessment.

154. 154 Discussion Leader Notes Refer to paragraphs 401.47-401.51 of this Guide for more information. Review the structure and format of Part 2 of the ?Fraud Risk Assessment Form? (CX-5). (Refer participants to PM-12 in their participant materials.) Discuss any issues they?ve had documenting overall responses. Review the structure and format of Step 2 of the ?Risk Assessment Summary Form? (RX-5) for risk-based audits. (Refer participants to PM-14 in their participant materials.) Discuss any issues they?ve had filling out Step 2.

155. 155 Documenting Overall Responses Auditors must document, in descriptive form, their overall responses to identified fraud risks. Using the PPC approach: Document overall responses in Part 2 of the ?Fraud Risk Assessment Form? (CX-5) or Step 2 of the ?Risk Assessment Summary Form? (RX-5).

156. 156 Discussion Leader Notes Refer to paragraphs 402.1-402.21 of this Guide for more information. EXHIBIT 4-5 presents steps for developing specific responses to identified risks. EXHIBIT 4-6 presents common types of auditing procedures and their use in responding to identified fraud risks.

157. 157 Specific Responses What are specific responses? Involve the nature, timing, and extent of auditing procedures. Developing specific responses: Consider the nature of the identified risk. Identify procedures that would detect understatement or overstatement. Does audit approach already developed for the engagement address the risk? Are additional procedures necessary? Consider the nature, timing, and extent of audit procedures.

158. 158 Refer to paragraphs 402.1-402.21 of this Guide for more information. EXHIBIT 4-7 presents examples of specific responses affecting the nature of auditing procedures. EXHIBIT 4-8 presents examples of specific responses affecting the timing of auditing procedures. EXHIBIT 4-9 presents examples of specific responses affecting the extent of auditing procedures. Discussion Leader Notes

159. 159 Specific Responses (cont.) Nature What? Timing When? Extent How many?

160. 160 Discussion Leader Notes Refer to paragraphs 402.22-402.32 of this Guide for more information. The bullet points at paragraph 402.23 provide good guidance for determining whether to perform tests of details or analytical procedures. Consider briefly discussing each item. EXHIBIT 4-10 illustrates using substantive tests of details to respond to fraud risks. (Refer participants to PM-17 in their participant materials.)

161. 161 Substantive Tests of Details Choosing between substantive tests of details and analytical procedures. Tests of transactions. Tests of the processing of individual transactions. Tests of balances. Tests applied directly to balances in the general ledger account. Considerations when using confirmations.

162. 162 Discussion Leader Notes Refer to paragraphs 402.33-402.52 of this Guide for more information. EXHIBIT 4-11 illustrates using analytical procedures to respond to identified fraud risks. (Refer participants to PM-18 in their participant materials.)

163. 163 Analytical Procedures Consider precision. Consider the reliability of the data. Design effective analytical procedures. Consider how fraud could occur. Develop expectations about what the results would be in absence of fraud. Respond to significant unexpected differences.

164. 164 Discussion Leader Notes Refer to paragraphs 402.53-402.88 of this Guide for more information. EXHIBIT 4-12 presents conditions that may indicate improper revenue recognition or the need to confirm transaction terms. EXHIBIT 4-13 illustrates using data extraction software to respond to identified fraud risks. Appendix 4B provides examples of common fraud schemes and related audit responses.

165. 165 Other Considerations Using tests of controls. Special considerations when responding to risks of misappropriation of assets. Responding to the risk of improper revenue recognition. Conditions that may indicate improper revenue recognition. Responses to risks of improper revenue recognition. Designing effective analytical procedures related to revenue. Using data extraction software.

166. 166 Discussion Leader Notes Refer to paragraph 402.89-402.92 of this Guide for more information. Review the structure and format of Part 2 of the ?Fraud Risk Assessment Form? (CX-5). (Refer participants to PM-12 in their participant materials.) Discuss any issues they?ve had documenting specific responses. Review the structure and format of Step 3 of the ?Risk Assessment Summary Form? (RX-5) for risk-based audits. (Refer participants to PM-14 in their participant materials.) Discuss any issues they?ve had filling out Step 3 (?Effect on Audit Scope? section) related to fraud risks.

167. 167 Documenting Specific Responses Auditors must document, in descriptive form, their specific responses to identified fraud risks. Using the PPC approach: Document specific responses in Part 2 of the ?Fraud Risk Assessment Form? (CX-5) or Step 3 of the ?Risk Assessment Summary Form? (RX-5).

168. 168 Discussion Leader Notes Refer to paragraphs 403.1-403.2 of this Guide for more information. Each of these will be discussed in the following slides.

169. 169 Responses to Address the Risk of Management Override of Controls Examine journal entries. Review accounting estimates. Evaluate significant unusual transactions.

170. 170 Discussion Leader Notes Refer to paragraphs 403.3-403.35 of this Guide for more information. EXHIBIT 4-14 presents factors affecting the extent of tests of journal entries. EXHIBIT 4-15 presents indications of unusual journal entries in general ledger accounts. (Refer participants to PM-19 in their participant materials.)

171. 171 Examining Journal Entries Obtain an understanding of processes and controls. Identify and select entries for testing, considering: The assessed risk of material misstatement due to fraud. The effectiveness of controls. The company?s processes and available audit evidence. Suspicious characteristics. The nature and complexity of the accounts. Journal entries outside the normal course of business. Determine the timing of tests. Inquire about unusual or inappropriate journal entry activity.

172. 172 Discussion Leader Notes Refer to paragraphs 403.36-403.47 of this Guide for more information. EXHIBIT 4-16 presents accounting estimates that may be significant.

173. 173 Reviewing Accounting Estimates Identify accounting estimates. The auditor?s responsibility under SAS No. 47. Perform a retrospective review. Considerations if possible bias is identified. Intentional or unintentional? Require an audit response?

174. 174 Discussion Leader Notes Refer to paragraphs 403.48-403.54 of this Guide for more information.

175. 175 Evaluating Significant Unusual Transactions What is the economic substance? Is the transaction overly complex? Is management overly concerned that the transaction receive a particular accounting treatment? Does the transaction involve previously unidentified related parties? Has the transaction been reviewed and approved at an appropriate level?

176. 176 Discussion Leader Notes Refer to paragraphs 403.55-403.57 of this Guide for more information. End of Part 4 and Chapter 4 text.

177. 177 Documenting Responses to Management Override Auditors must document the results of the procedures performed. For journal entries, recommend documenting the journal entries selected, the source and method of selection, the related accounting records and supporting documents examined, and the results of the tests. For other testing, may document testing in a memo or by signing off program steps. However, must indicate the results of procedures performed, not simply that they were performed.

178. 178 Discussion Leader Notes Exercise 5 Objective: To determine appropriate overall and/or specific responses to identified fraud risks. This exercise is based on the case studies in sections 401 and 402 of this Guide and the cumulative results of the case studies through section 303 and Exercise 4. Divide the class into small groups. Each group should spend 10 minutes to determine possible overall and/or specific responses to address each of the identified fraud risks provided in the Course Handout, ?Responding to Fraud Risks.? Each group should share their possible responses for each identified fraud risk. Encourage class discussion about any differences among groups. Paragraphs 401.52-401.56 and 402.93-402.97 and Appendix 4A present the authors? suggested solution. However, they are only suggestions and there are no right or wrong answers. Refer the class to PM-20, ?Documenting Responses Using RX-5,? if the firm uses a risk-based audit approach.

179. 179 Exercise 5-Responding to Fraud Risks Objective: To determine appropriate overall and/or specific responses to identified fraud risks. Use the Course Handout, ?Responding to Fraud Risks.?

180. 180

181. 181 Evaluation and Communication Objectives: Understand the evaluation requirements of SAS No. 99. Understand the communication requirements of SAS No. 99. Understand situations when fraud detection procedures may be performed.

182. 182 Discussion Leader Notes Refer to paragraphs 501.1-501.3 of this Guide for more information. EXHIBIT 5-2 provides examples of conditions that may change or support the auditor?s assessment of fraud risks. Examples 5-1 through 5-3 illustrate evaluating fraud risks throughout the audit.

183. 183 Evaluating Audit Evidence Evaluate during fieldwork. Assess fraud risks throughout the audit. Evaluate at or near the completion of the audit.

184. 184 Discussion Leader Notes Refer to paragraphs 501.4-501.17 of this Guide for more information. EXHIBIT 5-3 presents analytical relationships that may indicate additional fraud risks. Example 5-4 illustrates evaluating the results of analytical procedures. Examples 5-5 and 5-6 illustrate evaluating the cumulative results of audit procedures. Examples 5-7 and 5-8 illustrate evaluating misstatements. Example 5-9 illustrates responding if misstatements may be the result of fraud.

185. 185 Evaluating at Completion Evaluate results of analytical procedures. Evaluate risks of material misstatement. Evaluate and respond to misstatements. Consider the need to withdraw. Document other conditions and analytical relationships that caused the need to perform additional procedures, and responses to address those risks or conditions.

186. 186 Discussion Leader Notes Refer to paragraphs 502.1-502.12 of this Guide for more information. Example 5-10 illustrates communication about possible fraud to management and the audit committee.

187. 187 Communications Related to Fraud Communications about possible fraud. Communicate with appropriate level of management. Ordinarily precluded from reporting to outside parties. Required to document the nature of any communications about fraud. Communications of reportable conditions. SAS No. 60 communications. Communications may be oral or written.

188. 188 Discussion Leader Notes Refer to paragraphs 502.13-502.14 of this Guide for more information. EXHIBIT 5-4 presents example management representations related to fraud.

189. 189 Communications Related to Fraud (cont.) Management representations. Management?s acknowledgement of its responsibility for the design and implementation of programs and controls to prevent and detect fraud. Management?s acknowledgement that they have no knowledge of fraud or suspected fraud affecting the entity. Whether management has any knowledge of any allegations of fraud or suspected fraud affecting the entity received in communications.

190. 190 Discussion Leader Notes Refer to section 503 of this Guide for more information. End of Part 5 and Chapter 5 text.

191. 191 Performing Fraud Detection Procedures Extended audit procedures. Additional consulting services. Combined engagement.

192. 192

193. 193 Antifraud Programs and Controls Objectives: Understand what constitutes antifraud programs and controls. Understand how to create an ethical company culture. Understand how to implement antifraud controls. Understand how to develop an effective oversight process. Understand how to help clients design antifraud programs and controls.

194. 194 Discussion Leader Notes Refer to section 601 of this Guide for more information.

195. 195 What Are Antifraud Programs and Controls? Policies and procedures put in place to help ensure that management directives are carried out. Fraud prevention. Fraud deterrence. Fraud detection. Creating a system of antifraud program and control activities. Create an ethical company culture. Implement antifraud controls. Develop an effective oversight process.

196. 196 Discussion Leader Notes Refer to section 602 of this Guide for more information.

197. 197 Creating an Ethical Company Culture Set the tone at the top. Establish a code of conduct. Create a positive workplace environment. Hire and promote ethical employees. Provide ethics training. Discipline and prosecute violators.

198. 198 Discussion Leader Notes Refer to section 603 of this Guide for more information.

199. 199 Implementing Antifraud Controls Identify and assess fraud risks. Implement controls to mitigate fraud risks. General controls. Specific internal controls.

200. 200 Discussion Leader Notes Refer to section 604 of this Guide for more information.

201. 201 Developing an Effective Oversight Process Management. Audit Committee or Board of Directors. Internal audit. External auditors.

202. 202 Discussion Leader Notes Refer to section 605 of this Guide for more information.

203. 203 Helping Clients Design Antifraud Programs and Controls Review control environment, risk assessment, communication, and monitoring to identify weaknesses. Identify assets susceptible to misappropriation and risks areas for fraudulent financial reporting. Review the information system and control activities relating to vulnerable areas to identify weaknesses. Design/develop controls to mitigate weaknesses. Consider costs and benefits.

204. 204


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