• Like
Audit Responsibilities Related to Fraud
Upcoming SlideShare
Loading in...5

Thanks for flagging this SlideShare!

Oops! An error has occurred.

Audit Responsibilities Related to Fraud



  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
    Be the first to like this
No Downloads


Total Views
On SlideShare
From Embeds
Number of Embeds



Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

    No notes for slide


  • 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…