audit ch. 11
Terms in this set (25)
fraud is defined as (FS)
intentional misstatement of FS's
2 main categories of fraud
1. fraudulent financial reporting
2. misappropriation of assets
fraudulent financial reporting
intentional misstatement or omission with the intent to deceive users
Earnings management and income smoothing
"cookie jar reserves".
Understate income to save high earnings for future periods
misappropriation of assets
fraud that involves theft of assets
Conditions for Fraud (3)
Upon discovering information or other conditions that indicate material misstatement due to fraud
Auditors should do 3 things:
1. probe the issues
2. acquire additional evidence
3. consult with other team members
What are the sources of info gathered to assess fraud risks
1. Communication with Audit team
2. Inquiries of Management
3. Risk Factors (incentives/pressure)
4. Analytical Procedures (identify unusual relationships)
5. Other information
account balances compared to previous periods and %change analyzed
balances are calculated as % of total assets
After fraud risks are identified and documented, the auditor doesn't need to evaluate factors that reduce fraud risk before developing an appropriate response to the risk of fraud.
Collusion and false documentation make detection of fraud a challenge;
As a result it is usually more effective to focus on prevention and deterrence.
AICPA identifies 3 elements to
1. culture of honesty
2. management's responsibility (evaluate risk)
3. audit committee oversight
Research indicates that the most effective way to prevent and deter fraud is to
a. monitor all workers with access to assets
b. implement anti fraud programs that are based on the company's core values
c. increase controls for problem areas
d. none of the above
3 Auditor responses to a high fraud risk assignment
1. change the overall conduct of the audit (more experienced auditors)
2. perform audit that addresses fraud risk
3. perform audit that addresses management override controls
3 Procedures performed in every audit
1. examine journal entries for inappropriate "adjustments" and manipulation
2. Review accounting estimates for "bias"
3. Evaluate the business rationale for unusual transactions
3 Main types of revenue manipulations
1. Fictitious revenues
2. premature recognition
3. manipulation of adjustments to rev. (sales returns not accounted for yet)
obtain info about facts details the auditor doesn't have, usually about past or current events/processes
to corroborate or contradict prior information.
used to determine if the individual is being deceptive or purposefully omitting facts.
questions are more direct with "yes or no" answers.
When fraud risk factors are identified during an audit the auditor's documentation should include
I: The risk factors identified
II: Auditor's response to the factors identified
A: I only
B: II only
C: Both I and II
D: Neither I or II
Cash receipts from sales on account have been misappropriated. Which of the following acts will conceal this embezzlement and be least likely to be detected by the auditor?
a. understating the sales journal
b. overstating the accounts receivable control account
c. overstating the accounts receivable subsidiary records
d. understating the cash receipts journal
An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This trend may indicate that
A. Fictitious credit sales have been recorded during the year
B. Employees have stolen inventory just before year end
C. The client recently tightened its credit-granting policies
D. An employee has been lapping receivables in both years
Which of the following internal controls will best detect the theft of valuable items from an inventory that consists of hundreds of different items selling for $1 to $10 and a few items selling for hundreds of dollars?
a. have an independent auditing firm examine and report on management's assertion about the design and operating effectiveness of the control activities relevant to inventory
b. have separate warehouse space for the more valuable items, with sequentially numbered tags
c. maintain a perpetual inventory of only the more valuable items, with frequent periodic verification of the validity of the perpetual inventory records
d. require an authorized officer's signature on all requisitions for the more valuable items
From the ZZZ best case.
List 3 red flags that Auditor's overlooked
1. Amounts called from the restoration contracts were unrealistically large.
2. Virtually all of the insurance restoration contracts were from the same party
3. Contracts were often only one page long for million dollar contracts, and failed to have any detail of the work to be done