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Fraud and Error

The document discusses fraud and error, introducing fraud risk and errors and how internal controls can reduce or avoid them. It describes two types of misstatements relevant to auditors: those arising from misappropriation of assets, like employee theft, and those arising from fraudulent financial reporting, such as manipulation of accounting records.

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21 views1 page

Fraud and Error

The document discusses fraud and error, introducing fraud risk and errors and how internal controls can reduce or avoid them. It describes two types of misstatements relevant to auditors: those arising from misappropriation of assets, like employee theft, and those arising from fraudulent financial reporting, such as manipulation of accounting records.

Uploaded by

Winter Summer
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

FRAUD AND ERROR

Corporate Governance has been described as the process by which the owners and various stakeholders
of an organization exert control through requiring accountability for the resources entrusted to the
organization.

This chapter introduces FRAUD RISK AND ERRORS and how they can be reduced if not totally avoided
be having effective internal control – a tool of good corporate governance.

FRAUD is an intentional act involving the use of deception that results in a material misstatement of the
financial statement.

Two (2) types of MISSTATEMENTS that are relevant to auditor’s consideration of fraud:

a. Misstatements arising from misappropriation of assets


b. Misstatements arising from fraudulent financial reporting

MISSTATEMENTS ARISING FROM MISAPPROPRIATION OF ASSETS

Asset misappropriation occurs when a perpetrator steals or misuses an organization’s assets. Asset
misappropriations are dominant scheme perpetrated against small business and the perpetrators are
usually employees. Asset misappropriations can be accomplished in various ways, including embezzling
cash receipts, stealing assets, or causing the company to pay for goods or services that were not
received.

Asset misappropriation commonly occurs when employees:

 Gain access to cash and manipulate accounts to cover up cash thefts.


 Manipulate cash disbursements through fake companies.
 Steal inventory or other assets and manipulate the financial records to cover up the fraud.

MISSTATEMENTS ARISING FROM FRAUDULENT FINNACIAL REPORTING

The intentional manipulation of reported financial reported financial results to misstate the economic
condition of the organization is called fraudulent financial reporting. The perpetrator of such a fraud
generally seeks gain through the rise in stock price and the commensurate increase in personal wealth.
Sometimes the perpetrator does not seek direct personal gain, but instead uses the fraudulent financial
reporting to “help” the organization avoid bankruptcy or to avoid some other negative financial
outcome.

Three (3) common ways in which fraudulent financial reporting can take place include:

 Manipulation, falsification, or alteration of accounting records or supporting documents.


 Misrepresentation or omission of events, transactions, or other significant information.
 Intentional misapplication of accounting principles.

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