Term
| What are the 3 sides of the fraud triangle? |
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Definition
1)Pressures (motivation)
2)Opportunities (can be modified/eliminated)
3)Rationalization |
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Term
| fraud usually starts ____ and then ____ |
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Definition
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Term
| 2 types of fraud and which are auditors more concerned with? |
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Definition
1)fraudulent financial reporting (most concerned about b/c it effects investors)
2) Misappropriation of assets |
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Term
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Definition
| unintentional misstatements or ommisions |
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Term
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Definition
| INTENTIONAL misstatements or omissions |
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Term
| direct-effect illegal acts |
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Definition
| violations of laws or gov't. regulations by the company or its mgmt. or employees that produce DIRECT and material effects on $$ amts. in F/S's |
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Term
| "illegal acts" (not direct-effect) |
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Definition
| violations of laws & regulations that are FAR REMOVED from F/S effects (e.g., violations relating to insider trading, occupational health and safety, FDA, EPA, & equal employment opportunity); auditor not charged w/going above and beyond to investigate b/c so far-removed from F/S's |
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Term
| Steps in considering the risk of fraud (SAS 99) |
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Definition
1) audit team "brainstorming"
2)identify info. necessary to assess fraud risk factors
3)Identify & asses fraud risk factors
4)respond to risk assessment
5)evaluate audit evidence
6)communicate fraud matters
7)document fraud matters |
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Term
| is audit team brainstorming required? |
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Definition
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Term
| where do you go for info. to identify risk factors? |
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Definition
| Mgmt, audit committee, internal audit, others |
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Term
| what are 3 categories of fraud risk factors? |
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Definition
| mgmt. characteristics & influence, industry conditions, operating characteristics |
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Term
| management's characteristics and influence (fraud risk factors) |
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Definition
-motivation for fraud
-dominated by indiv. or small group
-not taking internal controls seriously
-aggressive Fin. reporting
-too much emphasis on projected NI
-high mgmt. influence on acct. principles & estimates
-high turnover of senior mgmt.
-known history of violations
-evasive managers
-frequent disputes w/auditors |
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Term
| industry conditions (fraud risk factors) |
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Definition
-profits lag the industry
-new requirements that could impair stability
-fierce competition
-industry declining
-industry changing rapidly |
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Term
| operating characteristics (fraud risk factors) |
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Definition
-weak internal control environment
-insuff. cash flows-going concern
-pressure to obtain capital
-operates in tax haven jurisdiction
-difficult actg measurement/present.
-sign. transactions that are hard to audit
-sign. & unusual related-party trans.
-accounting personnel are lax or inexperienced |
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Term
| What to consider when assessing risk (PALS) |
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Definition
-Sign. of risk-how big?
-Likelihood of risk-how likely?
-Pervasiveness of risk (spreading)
-Assess controls & programs |
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Term
| what are 2 examples of controls and programs pertaining to fraud risks? |
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Definition
1)code of ethics
2)ethics hotline |
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Term
| what are the presumed fraud risks? |
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Definition
-Improper revenue recognition
-Identify risks of mgmt. override of controls |
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Term
| how can the auditor identify risks of mgtm. override of controls? |
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Definition
-examine JE's and other adjustments
-Review actg. estimates for biases
-evaluate business rationale for sign. unusual transactions |
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Term
| Responding to assessed risks (step 4); what is the overall effect on the audit? |
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Definition
-assign. of personnel
-predictability of auditing procedures
-examination of JE's and other adjust.
-Examine bias in application of actg. principles
-Retrospective review of prior year actg. estimates |
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Term
| Responding to assessed risks (step 4); what are some EXTENDED procedures? |
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Definition
-surprise inventory count (changes predictability)
-Contract confirmations (call other entity to confirm what client asserts) |
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Term
| Communicate Fraud Matters; what does SAS 99 state? |
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Definition
| evidence that fraud may exist must be communicated to appropriate level of mgmt. (at least 1 level above where fraud has occurred) |
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Term
| What does SOX state regarding the communication of fraud? |
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Definition
| Significant deficiencies must be communicated to those charged w/governance (Audit Committee) |
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Term
| what should happen concerning fraud by mgmt? |
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Definition
| ALL fraud committed by mgmt. (no matter how small) is MATERIAL-must inform audit committee b/c mgmt. is in a position of trust and influence |
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Term
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Definition
| violations of laws or gov't. regulations by the company or its mgmt. or employees |
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Term
| direct-effect illegal acts (auditor responsible for these) |
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Definition
| acts that produce DIRECT & MATERIAL effects on F/S's (e.g., income tax evasion-in the books) |
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