1. CHAPTER 4
FRAUD & ERROR
Fraud – intentional act by one or > individual among mgt,
employee or 3rd
parties, which results in a misrepresentation of
financial statement.
Involve
Manipulation, falsification or alteration or records &
documents
Misappropriation of assets
Suppression/omission of effects of transactions from
records/documents
Recording of record without substance
Misapplication of accounting policies
Error – unintentional act or mistakes in financial statements
e.g – mathematical/clerical mistakes underlying records & accounting
data.
Oversight/misinterpretation of facts misapplication of accounting
policies
Withdrawal from engagement
When the entity does no take
remedial action regarding fraud
that considered material by the
auditor
Procedures where there is an indication
that fraud & error may exists
Responsibilities
Reporting of fraud &
error
Auditors
Do not held responsibilities for the prevention but deterrent
Conditions which high risk of fraud & error
Questions with respect to the integrity/competence of management
Unusual pressures with in/on an entity
Unusual transactions
Problems in obtaining sufficient appropriate audit evidence
Management
Implementation & continuing operation of adequate accounts & internal control system
Installing an effective accounting system.
Establishing an effective internal control system.
Establishing an internal audit function.
Appointing audit committee
Establishing and implementing code of conduct among the employee and
management
Do not eliminate but reduce
Depends on auditor’s judgment
The types of fraud & error indicated
The likelihood of their occurrence
The likelihood that a particular type of
fraud/error could have a material effect
on the financial statements
To management
Factual findings insignificant of the level of
immaterial/existence of the error
Auditor would consider all the circumstances
To users of the Auditor’s report on the
financial statements
Material effect & no correction has been
made (qualified/adverse opinion)
Obtain sufficient audit evidence to
evaluate material problems
(qualified/disclaimer)
Unable to determine due to limitation
imposed. The auditor should consider the
effect on the audit report.
To regulatory & enforcement auditors
Legal advice when duty of
confidentiality is overridden by statute,
law/courts.
Internal auditors
to detect fraud as they have a continual presence in the organization,
hence have a better understanding of the organization and its control
systems.
can assist management in
deterrence of fraud by examining and evaluating the adequacy and
the effectiveness of internal controls
establishing effective fraud prevention measures by knowing the
organization’s strengths and weaknesses and providing consulting
expertise.
