The purpose of the memo is to describe the auditor 's responsibility to consider fraud in financial statements by following eight steps to make sure the financial statements are free of material misstatement. The memo begins with an elaboration of fraud and the concepts related to it. A list of the steps is then provided before finally giving an outline of the various generic red flags of fraud that can act as a lead to the auditor in identifying fraud.
Fraud is misappropriation and misuse of the company 's assets, revenues and other resources. There are various types of fraud that can be committed with financial statements, including timing differences, fictitious revenues, concealed liabilities, improper disclosures, and improper asset
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The auditor then reviews the requirements against his capability to conduct the audit effectively and focus his attention on the most critical areas. The auditor should brainstorm on the areas that the client’s financial statements may be susceptible to fraud, how the assets of the client can be misappropriated and finally, how the management and those charged with governance can perpetrate fraudulent financial statements and be able to conceal the frauds. The auditor should also brainstorm any known internal and external factors that can be an incentive, or that can create pressure to the management to and other employees to commit fraud. The auditor should ensure the brainstorming session identifies the potential problems that are likely to occur during and after the audit process. The auditor brainstorming with the audit team helps ensure the work is implemented expeditiously and that no areas are left un-attended to. It also ensures that the work is properly coordinated among the staff and that all resources are well coordinated towards the achievement of the audit objectives.
The auditor then carries out an assessment of the engagement risks involved. These are the risks that are likely to come up during the audit period. The auditor should perform risk assessment procedures to get an understanding of the client’s business environment. The engagement risks assessment helps the auditor get more understanding of the
Fraud is defined as the intentional deception or misrepresentation of facts that can result in unauthorized benefit or payment. Abuse is
Describe how you would conduct the audit process, incorporating the analytical procedures you would use to investigate selected business transactions?
Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.”
The most common accounting fraud is the misrepresentation of financial statements which is frequently known as “cooking the books” and includes manipulation, falsification, or alteration of accounting records, intentional omission from the financial statements and intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure.
Describe what you believe is implied by the term “engagement risk.” What are the key factors likely considered by Deloitte and other audit firms when assessing engagement risk? How, if at all, are auditors’ professional responsibilities affected when a client proposes a higher than normal degree of engagement risk?
The purpose of this memo is to document the planning of the financial statement audit
Fraudulent financial reporting is one form of corporate corruption and may involve the manipulation of the documents used to record accounting transactions, the misrepresentation of accounting events or transactions, or the intentional misapplication of Generally Accepted Accounting Principles (GAAP) (Crumbley, Heitger, and Smith, 2013). Examples of fraudulent schemes befitting of this category abound and usually involve financial statement items that have been misclassified, omitted, overstated, undervalued, or prematurely recognized. One case involving CEO Bill Smith of Moonstay
2 Managing fraud risk: The audit committee perspective Fraud in a fi nancial statement audit
Engagement risk is the risk of the consequences of giving a wrong opinion to occur. Consequences include legal action against the auditor and loss of reputation of the auditor and lower fees charged.
Describe what you believe is implied by the term “engagement risk.” What are the key factors likely considered by Deloitte and other audit firms when assessing engagement risk? How, if at all, are auditors’ professional responsibilities affected when a client proposes a higher than normal degree of engagement risk?
When performing risk assessment procedures and related activities to obtain an understanding of the client and its environment, the auditor shall obtain an understanding of the following:
The manipulation of accounts fraud scheme is generally fulfilled by employees in top management positions and it usually involves making understatements or overstatements on financial statements making it very hard to detect. The process followed as Troy Adkins, (2015) explains is very simple. The financial statements are either overstated to show different figures in the earnings on the income statements making them look better than they actually are or the earnings in the current periods are manipulated in such a way that the revenue is understated or they inflate the current year’s expenses. The second process includes making the financial statements look worse than they are in reality. Deloitte, (2009) explains a number of ways which the accounts are manipulated where as one of the ways is to manipulate the reported earnings directly. They further explained that overstating the
The auditor must obtain an understanding of the entity and its environment, including internal controls, so that they can identify and assess the risks of material misstatement on financial statements due to fraud or error and design and perform further audit procedures.
Fraud is defined as a deliberate misrepresentation that causes a person or business to suffer damages, often in the form of monetary losses through deception or concealment. And Occupational Fraud as defined by the ACFE is the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets. Traditional fraud triangle theory by Donald Cressey explains that propensity of fraud occurring in an organization lies on three critical elements which are Pressure, Opportunity, and Rationalization.
Financial statement fraud is any intentional or grossly negligent violation of generally accounting principles (GAAP) that is undisclosed and materially effects any financial statement. Fraud can take many forms, including hiding both bad and god news. Research shows that financial statement fraud us relatively more likely to occur in companies with assets of less than $100 million, with earnings problems, and with loose governance structures (Hopwood, Leiner, & Young, 2011).