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Audit Responsibilities Related to Fraud
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Audit Responsibilities Related to Fraud

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Transcript

  • 1. Audit Responsibilities Related to Fraud
    • Basic responsibility -- must plan the audit to provide ‘reasonable assurance’ of detecting material misstatements (specifically, must now assess the risk of material misstatement due to fraud)
    • Professional standards identify 2 types of F/S-related fraud (must consider ‘risk factors’)
      • From fraudulent financial reporting
      • From misappropriation of assets
  • 2. Basic Responsibilities (Continued)
    • Required documentation -- must document the assessment of the risk of material fraud (and the implications of any identified ‘risk factors’)
    • Required communications
      • Must inform the audit committee when senior management is involved or when the misstatement is material ;
      • Must inform the appropriate level of management when fraud is not material
  • 3. Risk Factors Related to Fraudulent Reporting -- Examples
    • Related to management’s characteristics
      • High turnover in senior management positions
      • History of securities law violations/allegations
      • Conflicts between management & auditors
      • Unduly aggressive accounting principles or unreasonable earnings forecasts
      • Management dominated by one individual without compensating internal controls
      • Management’s compensation significantly based on incentives
  • 4. Risk Factors Related to Fraudulent Reporting – Examples (Continued)
    • Related to industry conditions
      • Unstable industry; rapidly changing, vulnerable to changes in technology or interest rates, etc.
      • Declining industry with an increasing number of business failures
      • Highly competitive markets with declining profit margins
  • 5. Risk Factors Related to Fraudulent Reporting -- Examples (Continued)
    • Related to operating characteristics
      • Indications of financial stress (weak cash flows from operations, problems with debt covenants)
      • Significant/unusual related-party transactions
      • Unusual relative growth or profitability
      • Significant, unusually complex transactions (especially near year-end)
      • Unusually subjective measurements affecting financial reporting
  • 6. Risk Factors Related to Misappropriation of Assets
    • Related to the susceptibility of assets to misappropriation (similar to ‘inherent risk’)
    • Related to internal controls over safeguards to assets (similar to ‘control risk’)
  • 7. When Should We Report Fraud to Outside Authorities?
    • Exceptions to “confidentiality” (Rule 301):
      • Must respond to a valid subpoena;
      • Must comply with SEC requirements (8-K) for example, when changing auditors
      • When authorized to communicate with the successor auditor
      • As required by Government Auditing Standards
  • 8. “Illegal Acts By Clients”
    • Basic responsibilities -- similar to fraud
      • Planning : design the audit to provide reasonable assurance of detecting illegal acts having a direct & material effect on the F/S
      • Field work : make inquiries of management (document in management representation letter) exercise due care & maintain “professional skepticism”
  • 9. “Illegal Acts By Clients”
    • If an illegal act is believed to have occurred
      • Gather information as to the facts & F/S effect
      • Discuss with appropriate level of management (at least 1 level above suspected persons); usually inform audit committee
      • Consider whether matter reflects on management’s integrity affecting other areas
  • 10. “Illegal Acts By Clients”
    • Audit responsibilities regarding reporting
      • Consider GAAP: modify opinion appropriately if F/S effects and/or disclosure is inadequate
      • Could make a case for a scope limitation if evidential matter is lacking
    • Same exceptions to “confidentiality” apply to illegal acts as for fraud…