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Fraud and Illegal Acts

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What does SAS No. 99 State?
The auditor must perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement whether caused by FRAUD or ERROR
What are errors?
Unintentional
What is fraud?
Intentional
What are the two types of fraud?
1. Fraudulent Financial Reporting-deliberate misstatements
2. Misappropriation of Assets-theft
What does SAS No. 99 require auditors to do?
Assess the risk of fraud on every audit engagement
What is the function of fraud risk according to SAS No. 99?
Prob(Fraud)=f(Motive, Opportunity, Character)
What are motives to commit fraud?
Operating losses
Financial Needs
Bonus Compensation
Contractual Commitments
Stock Options
What are Opportunities to commit fraud?
Weak internal controls
Weak BOD
Dominated Decisions
Accounts requiring significant judgements
Related party transactions
What is character to commit fraud?
Prior year problems
Lies/evasiveness
Poor reputation
Undue pressure on auditor
Agressive accounting
What should an auditor do if he concludes there is high risk of fraud?
Assign more experienced personnel
Use more manager/partner supervision
Rely more heavily on auditor examination and third parties
Conduct more testing (larger sample sizes)
Conduct the audit with heightened skepticism
What are the planning requirements according to SAS No.99
1.Hold a brainstorming session
2.Interview managers, BOD, employees about procedures to prevent deter and detect fraud.
3. Perform analytical procedures to identify unusual or complex transactions
What are SAS No. 99's fieldwork requirements?
1. REVENUE- Rev. Recognition is always a risk
2. INVENTORY-When inventory is material, the auditor should consider surprise inventory counts and examine carefully
3. ESTIMATES-Must perform retrospective reviews to assess prior year estimates
4. Review material journal entries made year-end
5. Vary audit procedures year-to-year
If fraud is discovered what should the auditor do?
Report the issue to senior management and the BOD. If it is not corrected they should issue a qualified or adverse opinion.
When can the auditor report fraud to outsiders?
Responding to an 8k
Responding to a successor auditor
When subpoenaed
When required by government
As required by the Securities Litigation Reform act of 1995 (when the client doesn't notify SEC)
Auditors are responsible for what illegal acts?
Those that have a direct and material effect on the financials:

Violations of the tax code
Usurious interest (limit on the amount of interest you can charge)
Utility rate violations
What are auditors less responsible for?
Things that have an indirect effect on the financials:

OSHA violations
Employment discrimination
Environmental violations