Fraud: Chapter 13

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______ can be costly and is among the hardest schemes to detect.

Corruption

______ in the traditional sense generally involves government officials' profiting from their public office.

Corruption

SAS 99 suggests that the key sources for the identification of fraud risk factors are:

Inquiries of management and others Analytic procedures Consideration of fraud risks Other information available within or about a specific company

________—a breach of fiduciary duty—also exists.

Private corruption

_______ are used to obtain audit evidence to evaluate account balances.

Substantive analytic procedures

______ may also reveal the purchase of unneeded assets, including inventory.

Trending asset balances

While evidential potential red flags are, like general fraud risk factors, not in themselves __________, they do indicate the existence of a specific gap, anomaly, or other problem in the available audit evidence.

conclusive evidence of fraud

When comparing sources of audit evidence, the auditor reviews the source document with a ______.

critical eye for issues

In analytic procedures, the more ________, the more likely that unexpected relationships will surface.

detailed the level of comparison

There is no linear relationship between the number of ______ and the _______.

fraud risk factors; level of fraud risk

Fraud risk factors are of limited significance in ______

isolation.

In placing reliance on a control to mitigate the risk of fraud, auditors should not discount the possibility that management or others may _______.

override controls

Four Broad categories of fraud:

-. Fraudulent financial reporting schemes - Misappropriation of assets—most common fraud against companies. - Revenues and assets obtained by fraud. - Expenditures and liabilities for an improper purpose.

_______ identify changes in amounts, ratios, trends or relationships and can help identify unusual transactions or events.

Analytic procedures

_______ represent one of the most important detection techniques.

Analytic procedures

Specific audit detection techniques include:

Analytic procedures Unpredictable audit tests Observing and inspecting Making inquiries and conducting interviews

_____ and ____ may assist in detection of corruption

Analytic procedures and data mining

The following are examples of ______: Current Company Data versus Company Data from Prior Periods. Company Data versus Company Budgets, Forecasts, or Projections. Company Data versus Industry Data and/or Comparable Company Data. Company Financial Data versus Company Operational Data. Company Data versus Auditor-Determined Expected Results.

Analytical Procedures

the use of official authority for private gain—straddles all of these categories.

Corruption

Substantive anomalies may come to light through these testing procedures. SAS 99 cites the following examples: - _____ in the accounting records - _____ or ____evidential matter - _____ or _____ events between the auditor and the client

Discrepancies Conflicting or missing Problematic or unusual

____ or _____ documents often have certain characteristics.

Fake or altered

_________ are used to assess the propriety of audit conclusions in an overall assessment of the presentation of the financial statement.

Final analytic procedures

______ are not the same as evidence of fraud; rather, they may indicate the existence of risks other than fraud.

Fraud risk factors

_______ can be ambiguous and difficult to observe. Some are essentially states of mind or related to an individual's private life or personal financial affairs.

Fraud risk factors

Fraud schemes can be: - __________ (carry legal risk - civil, regulatory and criminal). -___________ (carry the risk of loss of income or assets for the corporation and the risk of discovery and prosecution for the perpetrator).

Frauds by the corporation; Frauds against the corporation

What are some Analytic Techniques?

Horizontal analysis, Vertical (or common-size) analysis Comparison of the detail of a total balance with similar detail for the preceding year(s) Ratios and other financial relationships

SAS 99 identifies three categories of risk - the fraud triangle, which are?

Incentive and Pressure (Motive) Opportunity Rationalization and Attitude

Professional skepticism has several aspects, including the following 4:

Keeping an open mind Developing a heightened awareness Making a critical assessment of evidence Seeking corroboration

______ and _____ are standard parts of any audit work program, including vouching and tracing and performing or observing physical counts.

Observation and inspection

_____ of the audit approach may create opportunity and undermine detection

Predictability

_________ are used to develop an understanding of the company and to direct attention to high-risk areas in determining the nature, timing and extent of audit procedures.

Preliminary analytic procedures

Common elements of an _______ include: - Code of conduct - Ethics hotline/whistle-blower programs and activities - Hiring and promotion - Audit committee oversight - Investigation and remediation - Fraud risk assessment

antifraud program

Most common mechanisms of corruption are _____ and _____

bribes (paid) and kickbacks (received).

When a material misstatement due to fraud arises, the actions or omissions that give rise to the misstatement often occur over an extended period. The initial financial accounting impact may be relatively insignificant but __________

can accumulate over time.

SAS 99 provides for "__________________" In addition, analytic procedures that are performed as substantive tests may indicate a previously unrecognized risk of fraud.

considering the results of analytic procedures performed in planning the audit.

The recipients in ________ must obtain a gain without the knowledge or consent of their employer and in contradiction to their duty of loyalty to their employer.

corruption

Other potential red flags that may indicate a possible ______ include: Orders consistently placed with the same vendor Cost of materials or other purchases out of line when compared with related activities Buyers whose lifestyles appear to exceed their income levels Procurement decisions—in favor of key suppliers—that are heavily influenced or made by managers outside the purchasing department Restrictions in solicitation documents that tend to restrict competition A very short time frame for responding to bids

corruption scheme

The identification and evaluation of fraud risk factors is a ______ that ______

cumulative process; continues through the audit.

Fraud involves the use of ______. Auditors challenge explanations or documentary evidence that is inconsistent with information from other credible sources or with their prior experience or knowledge.

deception

The focus of catching corruption is weighted heavily toward ______

deterrence.

The potential benefit of this step is that the identification of _______ may provide the auditor with a reasonable basis for concluding that the likelihood of that kind of fraud is low.

effective controls

Once an auditor has identified the changes in amounts, ratios, trends or relationships, the next step is to determine whether the changes were ______ and, similarly, to determine whether ______________.

expected ; certain changes were expected but did not occur

the attributes of the risk will influence both the ____ to which the auditor needs to take specific steps to respond to a particular risk factor and the ____ of those steps.

extent; nature

Among the questions the auditor might raise with management, the following would be among the most important: - Does management have knowledge of any _____ that could result in a material misstatement of the entity's financial statements? - Regardless of _____, does management have knowledge of any fraud perpetrated, alleged or suspected? - Has management received any letters or communications from employees, former employees, analysts, short sellers or others concerning _______? - What is management's understanding of the _____?

fraud perpetrated, alleged or suspected; materiality; allegations of fraud; risks of fraud in the company

Probing and explicit questions about ________ may be asked during interviews with management, key financial staff and others.

fraud risks and the possibility of fraud

Using the ______ as a framework, the auditor considers whether there is evidence of other fraud risk factors. The auditor also considers the possibility that collusion is occurring at other levels of the organization.

fraud triangle

SAS 99 instructs auditors to focus on two areas of fraud—

fraudulent financial reporting schemes and misappropriation of assets.

The auditor may consider the possibility that the company's ______ may have relevant information or views.

general counsel

Unpredictability may be adopted as a strategy on two levels. - At a _______, the auditor may decide to visit locations or to audit areas or components of the financial statements that are not normally audited. At a ________, the auditor should be wary of being too predictable in the selection of individual transactions for detailed testing.

high level more detailed level

To understand the business, it is important to ______ and understand the _____ and _____

identify key business partners; corporate culture; organizational structure.

SAS 99 envisages a series of steps that are designed to assist the auditor in ______, _____, and _____ to the risk of material misstatement due to fraud.

identifying, evaluating and responding

A similar approach to questioning can be taken with the organization's _______ function.

internal audit

SAS 99 requires the consideration of _____ as the final ingredient in the assessment of identified risks of material misstatement due to fraud.

internal controls

The evaluation of the impact of fraud risk factors on the level of audit risk involves consideration of any ______.

internal controls

Questions to be asked of others within the organization will be tailored to their areas of _____ and their _____ in the company.

knowledge and their positions

SAS 99 suggests a number of procedures that "should be performed to further address the risk of ______."

management override of controls

SAS 99 calls for an auditor mind-set of ______ in conducting audit procedures, including interviews.

neutrality

Detection of bribes and kickbacks is difficult at best because these are typically buried in ______

otherwise legitimate transactions.

It is generally advisable to probe management and other staff regarding the _______ of the organization.

overall ethical environment

Analytic procedures must be used in audit _____ and in the ______ stage of the audit.

planning; overall review

The audit engagement leader ensures that a mechanism is in place within the audit team for the sharing of information concerning ______ so that any such information is brought forward and can be considered in a broader context.

potential fraud risk factors

It is not easy to identify and interpret _______

potential red flags

Adequate professional care means the auditor exercises ______.SAS 99 and other standards emphasize the importance of ______ in the consideration of fraud risk.

professional skepticism; professional skepticism

To the audit committee, the auditor might pose these questions: What are the audit committee's views regarding the _____? Is the audit committee aware of any ____? How does the audit committee ______ over activities concerned with the risks of fraud and the programs and controls established to mitigate risks? What is the audit committee's ___________ performance in this regard?

risk of fraud fraud perpetrated, alleged or suspected exercise oversight assessment of management's

SAS 99 makes clear that the auditor must apply professional judgment not simply in determining that there is a theoretical risk of material misstatement due to fraud but also in the consideration of the attributes of the risk, including: - The _____ of risk - The _____ of the risk - The _____ of the risk - The _____ of the risk

type; significance; likelihood; pervasiveness

An auditor's ability to detect fraud is significantly enhanced by ________ in which it operates. It is important to understand the business, the control procedures in place, the budgeting process, the accounting policies, the industry, and the general economic climate.

understanding an enterprise and the environment

SAS 99 specifically states that "the auditor should incorporate an element of _____ in the selection from year to year of auditing procedures to be performed."

unpredictability


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