l8 : fraud & auditing the income statement Flashcards

1
Q

what is fraud?

A

the intentional act by one or more individuals involving the use of deception to obtain an unjust or illegal advantage

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2
Q

what are the two types of fraud?

A
  • misappropriation of assets
  • fraudulent financial reporting
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3
Q

what is misappropriation of assets as a type of fraud?

A

theft of assets (cash, stock, fixed assets)

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4
Q

what is fraudulent financial reporting as a type of fraud?

A

when company assets are intentionally overstated or liabilities are understated in order to make a business appear financially stronger

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5
Q

what are the 3 elements of the fraud triangle?

A
  • incentive / pressure (provide motivation to perpetuate fraud)
  • rationalisation / attitude (thoughts that justify fraudulent action)
  • opportunity (circumstances exist that present an opp to commit fraud)
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6
Q

give 3 tests for sales for auditing the income statement.

A
  • analytical review of year end balance (existence, accuracy)
  • inspect sample of inventory delivered to customers using EoY goods dispatch notes (cut off)
  • inspect sample of after date credit notes using credit notes issued after YE (fraud risk)
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7
Q

give 2 tests for purchases for auditing the income statement.

A
  • analytical review of margin using year end balance (completeness, accuracy, fraud risk)
  • inspect sample of inventory delivered from customers using EoY goods dispatch notes (cut off)
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8
Q

give 3 tests for expenses for auditing the income statement.

A
  • analytical review of year end balance (completeness, accuracy, fraud risk)
  • review purchase invoices received after YE to check for accruals (cut off)
  • recalculate dep. charge (completeness, accuracy)
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9
Q

what is the audit risk associated with sales?

A

sales are overrstated (existence)

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10
Q

what is the fraud risk associated with sales?

A

credit notes issued after year end (cut off)

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11
Q

what is the audit risk associated with purchases?

A

purchases are understated (completeness)

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12
Q

what is the fraud risk associated with purchases?

A

margin manipulation

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13
Q

what is the audit risk associated with expenses?

A

expenses are understated (completeness)

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14
Q

what is the fraud risk associated with expenses?

A

payroll fraud (ghost employees)

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