Other Types:
Consideration of Fraud, Error, 1. Management Fraud – involving one or more members of mgt or
TCWG; commonly associated w/ FFR
and Non-compliance 2. Employee Fraud – involving employees of entity; commonly
associated w/ MOA
Objective of Auditor: Obtain reasonable assurance about whether the Characteristics (Fraud Triangle/Fraudulent Triangular):
F/S as a whole are free from material misstatements, whether due to
1. Incentive/pressure to commit fraud;
fraud or error (primary causes of mat. misstatements)
2. Perceived opportunity to do so; and
ERROR (error in omission) – unintentional misstatement in F/S 3. Some rationalization of the act
1. Mistake in gathering/processing data Responsibilities:
2. Incorrect accounting estimate (oversight/misinterpretation)
Management – responsible to perform day-to-day functions, internal
3. Mistake in application of accounting
controls and making F/S
FRAUD/IRREGULARITIES (error in commission) – intentional act by TCWG – supervise performance of mgt and responsible for approving
one or more individuals involving the use of deception to obtain an F/S
unjust/illegal advantage Both responsible for prevention and detection of fraud
Fraudster – person committing fraudulent activity Auditor
1. Identify and assess RMM;
Types:
2. Obtain sufficient and appropriate audit evidence; and
1. Fraudulent Financial Reporting (FFR) – omissions of 3. Respond appropriately to identified/suspected fraud
amounts/disclosures to deceive F/S users
Considerations:
Examples:
a. Overall objective of audit
a. Window Dressing ( A & Inc, L & Exp, E) – b. Inherent limitations of audit in context of fraud:
to mitigate/discover: cut-off tests 1. Unavoidable/audit risk;
b. Secret Reserve ( A & Inc, L & Exp, E)
2. Risk of not detecting fraud > Risk of not detecting error;
c. Kiting (example of window dressing) – to
mitigate/discover: bank reconciliation
3. Risk of not detecting mgt fraud > Risk of not detecting employee
d. Earning Management fraud; and
4. Subsequent discovery of fraud does not indicate a failure to
2. Misappropriation of Assets (MOA) – theft of entity’s assets comply w/ PSAs.
c. Professional skepticism – all throughout the audit
Examples: d. Discussion among engagement team
Fraud Brainstorming – exchanging of ideas about how & where
a. Embezzlement of receipts
b. Abstraction of funds the F/S might be susceptible to fraud
c. Theft of invty Fraud Discussion – emphasizing the importance of maintaining
d. Use of entity’s resources for personal use proper state of mind
Audit Procedures: Documentation – list of items required to be documented:
RAPs and Related Activities 1. Auditor’s understanding of entity and assessment of RMM
1. Obtain understanding of entity and its environment 2. Auditor’s responses to assessed RMM
a. Consider whether one or more fraud risk factors are present 3. Communications about fraud w/ mgt, TCWG, regulators & others
(events/conditions that indicate an incentive/pressure to 4. Conclusion that RMM due to fraud related to revenue recognition
commit fraud); is not applicable in the circumstances and the reasons for
b. Consider any unusual/unexpected relationships from APs conclusion
performed; and
c. Consider other info that may be helpful NON-COMPLIANCE/ILLEGAL ACTS – acts of omission/commission
2. Identify and assess RMM due to fraud by entity, either intentional or unintentional, which are contrary to
prevailing laws/regulations (does not include personal misconduct)
FAPs and Related Activities Categories of Laws & Regulations
1. Responses to RMM due to fraud Category Examples Auditor’s Responsibilities
2. Evaluation of audit evidence Laws & regulations w/ To obtain sufficient
3. Obtain mgt representations direct effect on appro. evidence
Tax laws
determination of mat. regarding compliance
a. It acknowledges its responsibility for design & implementation Pension laws
amounts & disclosures in w/ provisions of laws &
of internal controls F/S regulations
b. It has disclosed to auditor the results of its assessment that F/S Compliance w/
Laws & regulations that
may be materially misstated do not have direct
terms of operating Limited to undertaking
c. It has disclosed to auditor its knowledge of fraud/suspected license specified audit
effect on determination
Compliance w/ procedures to help
fraud of amounts & disclosures
regulatory solvency identify noncompliance
d. It has disclosed to auditor its knowledge of any allegations of in F/S, but compliance
requirements w/ those laws &
fraud/suspected fraud w/ which may be
Compliance w/ regulations that may
fundamental to
environmental have mat. effect on F/S
Auditor Unable to Continue the Engagement operating aspects
regulations
1. Consider professional & legal responsibilities applicable in
circumstances (i.e., to report); Responsibilities:
2. Consider possibility of w/drawing from engagement; and
3. If auditor w/draws: (1) Discuss w/ appropriate level of mgt & 1. Management – w/ oversight of TCWG, ensure that entity’s
TCWG; and (2) Consider professional/legal requirement to report operations are conducted in accordance w/ laws & regulations
2. Auditor – cannot be held responsible for preventing
Communication noncompliance
1. To Management – at least one level above the person involved
Objectives of Auditor:
2. W/ TCWG
a. Obtain sufficient appropriate evidence regarding
a. When auditor has identified fraud involving mgt or employees
compliance;
who have significant roles in IC
b. Perform specified audit procedures to help identify
b. Material weaknesses in design/implementation of IC
instances of noncompliance; and
3. To Regulatory and Enforcement Authorities
c. Respond appropriately to noncompliance/suspected
noncompliance
General Audit Procedures
1. RAPs and related activities:
a. Obtain general understanding of legal & regulatory
framework
b. Inquiry of mgt as to whether entity is in compliance
c. Inspecting correspondence
2. FAPs – obtain sufficient appro. evidence
3. Management Representations
Reporting of Noncompliance
1. To TCWG
If auditor suspects that mgt and TCWG are involved in
noncompliance, auditor shall communicate the matter to
next higher level of authority at entity (audit
committee/supervisory board)
No higher authority exists – auditor shall consider the need
to obtain legal advice
2. In Auditor’s Report on F/S
Noncompliance is material and not reflected in F/S –
qualified or adverse
Auditor is precluded from obtaining sufficient appro. audit
evidence – qualified or disclaimer
Entity does not take remedial action that auditor
considers necessary – withdraw from engagement
3. To Regulatory & Enforcement Authorities
4. To Other Auditor
5. To Proposed Auditor
