l8 : fraud & auditing the income statement

Question 1

what is fraud?

Answer 1

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

Question 2

what are the two types of fraud?

Answer 2

• misappropriation of assets
• fraudulent financial reporting

Question 3

what is misappropriation of assets as a type of fraud?

Answer 3

theft of assets (cash, stock, fixed assets)

Question 4

what is fraudulent financial reporting as a type of fraud?

Answer 4

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

Question 5

what are the 3 elements of the fraud triangle?

Answer 5

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

Question 6

give 3 tests for sales for auditing the income statement.

Answer 6

• 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)

Question 7

give 2 tests for purchases for auditing the income statement.

Answer 7

• 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)

Question 8

give 3 tests for expenses for auditing the income statement.

Answer 8

• 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)