Three Conditions that Can Lead to Financial Statement Fraud (CAQ Video) - Answers 1.
Pressure/incentive
2. Opportunity
3. Rationalization
Fraud triangle!
Why does AU-C 240 Focus on Testing Journal Entries? - Answers They're the best way to reveal mgmt
override. The majority of sig F/S fraud involves senior mgmt, so have to test JEs for mgmt override.
Even if specific RMM due to fraud aren't ID'd by the auditor, a possibility exists that mgmt override of
controls could occur. AU-C 240. Looking at JEs can detect this.
Describe the Audit Procedures/Steps Auditors Can Take to Eliminate Fraud in the Financial Statements -
Answers Can't eliminate fraud! Plot twist.
Applicable Professional Standards for Financial Fraud - Answers AU-C 240, consideration of fraud in a F/S
audit.
AU-C 315, understanding the entity and its environment.
ISA 240, the auditor's responsibilities relating to fraud in an audit of the F/S.
ISA 315, identifying and assessing the risks of material misstatement through understanding the entity
and its environment.
AS 13/2301, the auditor's response to the risks of material misstatement.
AU 316/2401, consideration of fraud in a F/S audit.
,The Most Costly Type of Fraud - Answers Financial Reporting Fraud. Bc of the impact on 3rd party F/S
users.
Most common fraud is misapprop of assets (theft of cash/inv, etc.). Not most costly.
The Distinguishing Factor Between Fraud and Error - Answers Whether the underlying action that results
in the misstmt of the F/S is *intentional or unintentional*. ISA/AU-C 240.
Intent!
Those charged with governance (BOD/audit committee) and mgmt have primary responsibility for
prevention/detection of fraud. 1st line of defense. ISA/AU-C 240.
Auditor's Responsibility for the Detection of Fraud - Answers An auditor conducting an audit in
accordance w/ ISA's is responsible for obtaining reasonable assurance that the F/S taken as a whole are
free from MM, whether caused by *fraud or error*. ISA/AU-C 240.
Equal responsibility either way.
Key guidance from AU-C 240:
1. importance of exercising prof skepticism.
2. discussion among engagemt team abt RMM due to fraud (brainstorming).
3. obtaining info needed to ID RMM due to fraud.
-inquiry of mgmt
-those charged w/ gov
-analytical procs during risk assessmt; show where to look, don't find fraud themselves
-fraud risk factors (fraud triangle)
,4. AU-C 330 performing audit procs in response to assessed risks; says how auditor is to determine
overall responses to address RMM due to fraud at F/S level.
Incorp consideration of fraud risk factors throughout audit!
Additionally:
-assign/supervise personnel, taking into acct fraud assessmt.
-eval selection/application of accting principles (aggressive v conservative).
-incorp element of unpredictability into selection of audit procs.
PCAOB Observations About Fraud Detection by Auditors - Answers -checklist approach; can prevent
critical eval
-lack of documentation inhibits review
-failed to expand audit procs; no follow up
-brainstorming session held too late; S/B at beginning of engagemt
-session not attended by key members
-failed to eval risk of mgmt override
-analytical procs not well-suited to detect fraud; overreliance on them
Responses to Address the Risk of Management Override - Answers -review accting ests for biases
-eval bus rationale for sig unusual trans (internal/external pressures)
-test appropriateness of JEs and other adjs
AU-C 240
Three Classifications of Journal Entries - Answers 1. Standard, recurring entries: procuremt, payroll.
Lower risk.
2. Non-std entries: corrections. Worldcom.
, 3. "Top-side" entries: EOY or end of quarter (reporting pd). Most risk. Less controls at pd-close time.
Senior mgmt must also usually process these.
Steps to Test Journal Entries - Answers 1. Consider RMM due to fraud and effect on JE testing.
2. Obtain understanding of FR process and controls over JEs.
3. Determine completeness of population.
4. ID and select JEs. Need total pop.
5. Perform JE audit procs. Eval JEs for reasonableness.
Typical Internal Controls over Journal Entries - Answers 1. SOD; auth, posting, reviewing, and
reconciliation.
2. Auth to record/approve JEs.
3. Oversight of JE posting process.
4. Regular testing of I/C (by IA).
T/F: Most Individuals Who Engage in Financial Statement Fraud Have Prior History - Answers False!
Determining Completeness of Journal Entries - Answers -normal accting processes
-manual entries
-entire yr
-special focus on pd-end entries
-subsidiary ledgers
-gen ledgers at subsidiaries
-use CAAT techniques (comp audit).
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