Fraud Auditing. Chapter 11. Types of Fraud. Fraudulent financial reporting. Misappropriation of assets. The Fraud Triangle. Incentives/Pressures. Opportunities. Attitudes/Rationalization. Examples of Risks Factors for Fraudulent Reporting. Incentives/Pressures.
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Fraudulent financial reporting
Misappropriation of assets
Financial stability or profitability is threatened by
economic, industry, or entity operating conditions.
Excessive pressure exists for management to
meet debt requirements.
Personal net worth is materially threatened.
There are significant accounting estimates that
are difficult to verify.
There is ineffective oversight over financial
High turnover or ineffective accounting internal
Little communication and support of the
entity’s core values is evident.
A history of violations of laws is known.
Management has a practice of making
overly aggressive or unrealistic forecasts.
Personal financial obligations create pressure to
Adverse relationships between management
and employees motivate employees to
There is a presence of large amounts of cash
on hand or inventory items.
There is an inadequate internal control over
Disregard for the need to monitor or reduce
risk of misappropriating assets exists.
There is a disregard for internal controls.
SAS 99 provides guidance to auditors
in assessing the risk of fraud.
SAS 1 states that, in exercising professional
skepticism, an auditor “neither assumes that
management is dishonest nor assumes
among audit team
Identified risks of material misstatements due to fraudSources of Information Gathered to Assess Fraud Risks
1. Create and maintain a culture of honesty
and high ethics.
2. Evaluate fraud risks and implement programs
and controls to mitigate identified fraud risks.
3. Develop an appropriate fraud oversight process.
Organizational code of conduct
General employee conduct
Conflicts of interest
Outside activities, employment, and directorships
Relationships with clients and suppliers
Gifts, entertainment, and favors
Kickbacks and secret commissions
Organization funds and other assets
Organization records and communications
Dealing with outside people and organizations
Privacy and confidentiality
1994Organizational Factors Contributing to Risk of Fraud
Lack of control
nonexistent ethics or
Change the overall conduct of the audit
to respond to identified fraud risks.
Design and perform audit procedures
to address identified risks.
Design and perform procedures to
address the risk of management
override of controls.
Revenue and accounts receivable fraud risks
Inventory fraud risks
Purchases and accounts payable fraud risks
regulatory or law
When fraud is suspected,
the auditor gathers
to determine whether
fraud actually exists.