Fraud, Error, Evaluation Of Mistatements & Reporting Contol Weaknesses Flashcards
What are the examples of fraud
Fraudulent financial reporting (e.g. overstating profits to attract new investors)
Misappropriation of assets (e.g. theft of cash, inventory or NCA)
How can something be misstated
Incorrect amounts
Incorrect classification/presentation
Incorrect disclosure
What is the auditors responsibility regarding fraud
It is the management responsibility to prevent and detect fraud and not the auditors. this can be greatly helped win affective system of internal controls
Auditors are not expected to find every fraud what are expected (with reasonable assurance) to find material misstatements.
They expected to exercise professional scepticism and to follow up on any suspicions they may have
Once a suspicion of fraud or error is this covered the auditor must perform mall or at work including discovering how the Fraud or error occurred, discovering if the incident is isolated, consider applying computer-assisted audit techniques to look for similar patterns, estimating the financial effect.
What are the three conditions that are usually present when fraud exists
Incentive or pressure to commit fraud
Opportunity to commit fraud
Attitude to go through with the fraud
When me the order to not be able to continue performing the audit regarding fraud or error
Management of those charged with covenants appear to be responsible for committing a fraud
There is a significant risk of material and pervasive fraud
Failure to take appropriate action is raises significant concerns about management integrity
What is management bias and what are the factors that may produce bias
Management bias is a lack of neutrality and make presents a risk of fraudulent reporting. E.g.
Bonus dependence on hitting profit targets
Jobs dependent on level of performance
The business is going to be floated on the stock exchange so higher profits increase the flotation price
The business is targeted for a takeover and the purchase price will be influenced by performance
How should the order to evaluate the statement identified
ISA 450 evaluation of misstatements identified during the audit requires auditors to accumulate identified misstatements.
Former statements accumulated during the audit should be communicated to management
Management should correct them or explain why not. Misstatements can be characterised as
Factual - definitely incorrect
Judgemental - client & auditor have different opinions
Projected - auditors best estimate of error
The characterisations above affect how much compromise is acceptable.
Obtain written representation from management that they believe incorrect Emma statements are not material or the reasons for believing that certain uncorrected misstatements Are not misstatements
Assess materiality of uncorrected misstatements individually and aggregate
If management refuses to correct my statements in the order so will have to issue a qualified opinion
How should the auditor reports deficiencies in internal controls
ISA265 communication deficiencies in internal controls so those charge with governance and management requires the auditor to determine whether deficiencies individually or in combination are significant
What are factors that influence something being significant
The likelihood that the deficiency will lead to a material misstatement
The Susceptibility to loss or fraud of the related assets or liability
The subjectivity and complexity of determining estimated amounts
In line for financial statements amounts exposed to the deficiencies
The volume of activity in the account balance or classic transactions exposed to the deficiency
