Fraud: Chapter 13
______ 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