Advanced Audit Test II - Fraud

Fraud includes any intentional or deliberate act to deprive another of property, money, or the gaining of advantage by false suggestions, suppression of the truth, or inappropriate action.

Association of Certified Fraud Examiners

-Pressure-
Opportunity
-Rationalization

Adds Capability

Fraudulent Financial Reporting (SAS 82 & 99)
e.g., “cooking the books”
- this is the most costly

Misappropriation of Assets (SAS 82 & 99)
e.g., embezzling cash and stealing assets
- this is the most common

Corruption (SAS 54)
e.g., bribery and kickbacks

Primarily addresses two types of fraud:

fraudulent financial reporting (mgmt. fraud)
misappropriation of assets (theft/defalcation)

provided more specific guidance for evaluating fraud risk factors (i.e., “red flags”)

Auditors must…
-increase emphasis on professional skepticism.

-brainstorm possible frauds and exchange ideas.

-conduct more inquiries about fraud risk and encourage “whistle blowing”.

-develop unpredictable audit tests.

-test for mgmt. override of controls.

-presume that improper revenue recognition is a fraud risk.

-Review accounting estimates for biases
retrospective review of significant estimates

-Evaluate rationale for significant, unusual transactions
complexities, presence of RPTs, SPEs

-Consider predictability of auditing procedures
selected procedures in areas without identified fraud risks

Violations of laws or governmental regulations


Auditor’s Responsibilities for Detection
1. direct & material effect on f/s = SAS 82
2. otherwise, no responsibility for detecting

Improper Revenue Recognition
early booking, holding books open

Improper Sales Accounting
fictitious sales, consignment sales

Improper % of Completion Accounting

Inadequate Disclosure of Related-Party Transactions
conflict-of-interest, sham transactions

Improper Asset Valuation
inventory, accounts receivable

Omission of Liabilities and Expenses

Cash Schemes
skimming, voids, underrings, fictitious refunds, kiting

Accounts Receivable Schemes
lapping, fictitious A/R

Inventory Schemes
personal use, embezzlement of scrap proceeds

Purchasing Schemes
duplicate pmts, excess purchasing

Payroll Schemes
overtime abuses, ghost employees

Personal Expense Reimbursement Schemes

Gathering sufficient audit evidence

Exercising due professional care

Demonstrating appropriate level of professional skepticism

Interpreting/applying GAAP

Designing audit programs and planning engagement

Relying too much on inquiry

Obtaining evidence related to significant estimates

Confirming accounts receivable

Recognizing/disclosing related party transactions

Relying too much on internal controls