Assessing and Responding to Fraud Risks

Question 1

Types of fraud

Answer 1

Fraudulent financial reporting

Misappropriation of assets

Question 2

Fraudulent financial reporting ?

Answer 2

is an intentional misstatement or omission to deceive the user. (overstate or understate income)

Question 3

Misappropriation of assets

Answer 3

involves theft of assets usually by internal parties but can be external sometimes

Question 4

conditions for fraud ?

Answer 4

• incentives/pressure
• opportunity
• attitude rationalization

Question 5

Incentives/pressure for fraudulent financial reporting ?

Answer 5

low profitability or low ability to repay debts and trying to reach budget or analysts forecasts or condition for debt convents or mangers trying to earn bonuses

Question 6

opportunities for fraudulent financial reporting ?

Answer 6

existence of accounting estimates and judgements , weakness if ais and internal control and high turnover of accounting and information technology employees .

Question 7

Attitudes/rationalization fraudulent financial reporting

Answer 7

managerial disregard of financial reporting process and desire to reach overly optimistic forecasts and lack of ethics

Question 8

Misappropriation of assets incentive/pressure ?

Answer 8

financial pressure on employees or dissatisfaction with the company

Question 9

Misappropriation of assets opportunities ?

Answer 9

easy access to cash or inventory and weakness of internal controls and lack of adequate separation of duties

Question 10

Misappropriation of assets attitudes/rationalization

Answer 10

management’s attitude towards ethics

Question 11

sources of information to asses fraud risks

Answer 11

communicate among the audit team
inquiries of management  
risk factors
analytical procedure
other information

Question 12

communication among the audit team

Answer 12

may reveal poor controls or suspicious observations by the audit team

Question 13

inquiries of management

Answer 13

management could be suspicious or aware of fraud happening ,they should always be asked about knowledge of any fraud and what they did to deal with it

Question 14

risk factors

Answer 14

the auditor has evaluate the existence of risk factors , the existence of one or more does not definitely means there is fraud but more attention has be given to the issue

Question 15

Analytical procedures

Answer 15

may show a difference between the auditors expectations and the reported figures which could be the result of hidden fraud

Question 16

other information

Answer 16

maybe obtained through risk assessment and reputation and employees

Question 17

what is the auditor’s response to fraud risks

Answer 17

• changing overall conduct of the audit (adding fraud specialists and unpredictability to the audit procedures to meet fraudster’s possible familiarity with the traditional process)
• designing and performing audit procedures to address fraud risks at the assertion level
• designing and performing procedures to address management override of controls

Question 18

what if fraud is suspected ?

Answer 18

an auditor should gather additional information by inquiries of management and other parties to obtain new info or corroborate or contradict prior info or to determine if individuals are deceptive
also using audit software analysis CAATs and use of expanded substantive testing

Question 19

main type of revenue manipulation of fraudulent financial reporting

Answer 19

• fictitious revenue (fake revenue)
• premature recognition of revenue
• manipulation of adjustments to revenue (sales return bad debt expense)

Question 20

main type of revenue manipulation regarding misappropriation of assets

Answer 20

• failure to record a sale (steal cash or inventory without recording )
• theft of cash after sale is recorded (sale return , bad debt allowance)

Question 21

main type of Accounts payable or purchases manipulation of fraudulent financial reporting

Answer 21

• not recording a/p until subsequent periods

- fictitious reductions to account payable

Question 22

main type of accounts payable and purchases manipulation regarding misappropriation of assets

Answer 22

• issuing payments to fictitious vendors and stealing the money
• stealing payments to real vendors

Question 23

Fraud risks in fixed and intangible assets

Question 24

fraud risks in payroll accounts

Answer 24

-overstating inventory
-overstating costs
-manipulating fringe benefits
creation of fictitious employees and stealing their salaries