INTERMEDIATE ACCOUNTING 3 User’s Decision

Conceptual Framework for Financial Accounting -Buying, selling, holding entity

(Revised) -Exercising votes on
Why Develop Conceptual Framework? -providing or settling loan
- Stochastic Solutions User’s Assessment
- Judgments, Models, Estimates -prospects for future net cash inflows
- Conflicting Standards
- Creative accounting -mngt. Stewardship of economic resources
- Political Forces Information needed
- Rule-based system
-economic resources, claims against entities
*Conceptual Framework is not an accounting standard
itself. Existing IFRS will prevail than the C.F. -how efficient and effective the mngt. in discharging
the economic resources
Purpose of C.F
Users of F.S
1. Assist the board to develop IFRS Standards
2. Assist preparers of financial reports to develop -Investors (Potential and current)
consistent accounting policies for transactions -Lenders and other Creditors
3. Assist all parties to understand and interpret
-Employees
standards
-Suppliers and other trade creditors
Effectivity of the C.F
-Government agencies (to regulate the activities, taxes)
-Immediately for the Board and the IFRS
Interpretations Committee -Public (contribute to the locality, giving job
opportunities)
- Annual Periods on or after Jan1, 2020, those develop
an accounting policy based on C.F Information provided by reporting entity
Why revised it? -Financial Position
-Priority by stakeholder -financial performance
-Filling the gaps (guidance on measurement etc.) -Changes in economic resources and claims
-Updating Objectives of Reporting entity
-Clarifying -Consolidated F.S (parents and subsidiary)
Main Changes? -Unconsolidated (parents only)
(New) -Combined (not related consolidated entity e.g.
siblings’s entity FS)
-Measurement and factors it consider in selecting
*Underlying Assumption- Going Concern Basis
-Presentation and disclosure (When to classify)
Fundamental Q.C
-Derecognition (guidance in removing items in F.S)
*Relevance--- Predictive Value and Confirmatory
(Updated)
Vaue; Materiality (magnitude of info to where item
-Definition could be measured)
-Recognition (When to?) *Faithful Representation--- Neutrality (free from bias,
(Clarified) use of exercise of prudence), Complete (all relevant
info must be included), Free from error (not
-Prudence (neutrality) accurately, but doesn’t have mistakes and error);
-Management Stewardship (Need of information) Measurement Uncertainty
-Measurement Uncertainty Enhancing Q.C
-Substance(/) over form *Comparability--- consistency
*Verifiability--- consensus, different users can reach 1. Fair Value- reflects market participants current
same thoughts about financial information (although measurement about amount, timing and
not purely) uncertainty
2. Value in Use/ Fulfillment Value- Current
*Timeliness--- capable of influence users at a time
expectations in an item. Present value of future
*Understandability--- clearly and concisely; cash flows, from continuing use until its
reasonable knowledge disposal
Cost- pervasive Constraint. “Cost should not exceed its 3. Current Cost- reflects the condition of the item
benefits.” in the current time. (Net Realizable Value)

ASSET- elements are: Presentation and Disclosure Concepts

1. Rights- to use, to sell, pledge the object, -Effective Communication of FS

other undefined rights. -Should have Communication tools
2. potential for economic benefits- does not
Statement of Profit or Loss
need to be certain. It’s only necessary that
at least one circumstances it’ll give benefit. Other Comprehensive Income
3. Control- present ability to direct resource Concept of Recycling- income and expensive in OCI
used. are not subsequently recycled. Hence, it will be
LIABILITY- elements are: directed to the equity.
1. no practical ability to avoid or transfer- only in Concepts of Capital
liquidation (under such circumstances) Financial C- Capital=Net Assets
2. obligation to transfer an economic resource- it
does not need to be certain. Physical C-Capital= Productivity Capacity
3. present obligation as a result of past events-
had already obtained economic resource.
4. executory contract- equally unperformed,
establishes single asset/liability for the
inseparable right/obligation to exchange
economic resource.
Recognition – inclusion of item that meets definition
of an account (A,L,Eq,I,&Ex)
Recognition Criteria
1. Relevance- Existence Uncertainty, Low
Probability of flow of economic benefits
2. Faithful Representation – Measurement
Uncertainty, Recognition Inconsistency
(Accounting mismatch), Presentation and
Disclosure
Derecognition- removal of all or part of recognized
asset or liability in the financial position
Application
1. Asset- losses control in the item
2. Liability- no longer have the present obligation
Measurement of Elements
Historical Cost- reflects price of transaction, original
cost when acquired by entity.
Current Value
 AUDITING PRINCIPLES  BOA is composed of a Chairman and six (6) members, a
vice chairman is elected. The four sectors shall, as much as
AUDITING AND ASSURANCE PRINCIPLE possible be equitably represented in the board
 Qualifications
THE ACCOUNTANCY PROFESSION: PRACTICE AND
1. Must be natural born citizen and resident of the Ph.
REGULATION
2. Must be a duly registered CPA with AT LEAST 10 years
Accountancy – plays a VITAL ROLE in the overall
of work experience in any practice of accountancy
business and economic environment.
3. Must be a good moral character and must not have been
Accounting – Language of business
convicted of crimes involving moral turpitude
Profession
4. Must not have any pecuniary interest, in any educational
Definition Characteristics
institution conferring and academic degree necessary for
admission to the practice of accountancy or where review
 Vocation  Mastery of particular class in preparation for CPALE are being offered or
 Specialized educational intellectual skill, acquired conducted.
training by training and education. Note: Five (5) nominees of PICPA will be passed to PRC,
 Intended to supply  Adhere by its member PRC will pick three (3) to be recommend to the Philippine
objective counsel and to a common code of president and the president will appoint one (1)to be the
service to others values and conduct chairman of BOA .
 For a direct and definite  Acceptance of duty to  Powers and function of the board
compensation, apart from society  To prescribe and adopt the rules and regulations to carry
expectation of other gain out the act.
 For the practice of accountancy
Regulation of the accountancy profession  Supervise the registration, licensure and practice
Timeline  To administer oaths
 1923 – legally recognized as a profession in the  To issue, suspend, revoke or reinstate certificate
Philippines when Act No. 3105on March 17, 1923 was of registration
approved by the 6th Ph. Legislature  To adopt official seal
 1967 – Accountancy act of 1967 or RA No. 5166 was  To prescribe or adopt a code of ethics
approved on August 4, 1967  To monitor conditions and adopt measures
 1975 – Revised accountancy law or PD No. 692 was  To conduct an oversight of audit quality
approved on May 5, 1975  As to control
 2004 – Philippine Accountancy Act of 2004 or RA 9298  To investigate violation and to issue summons
was approved on July 28, 2004  To issue cease and desist order to violators
Objectives of RA 9298  To punish for contempt of the board
 Standardization and regulation of accounting education  For educational
 The examination for registration of CERTIFIED  Prepare, adopt, issue or amend the syllabi of the
PUBLIC ACCOUNTANT subjects for examination
 The supervision, control, and regulation of the practice  To ensure that all higher accounting educational
of accountancy in the Philippines. institution comply with the policies, standards and
Note: Organizations that has the primary duty to effectively requirements of the course prescribed by CHED or other
enforce or implement the provision of RA 9298 are both the authorized government offices or CPE council
PRC and the BOA.  To exercise such other powers as may be provided by
Scope of practice / Sectors of RA 9298 law which are necessary of incidental to the carrying out of,
 Commerce and industry (employer – employee the express powers granted to the board to achieve the
relationship) objectives and purpose
 Education or academe (teacher – student relationship)  Grounds for suspension or removal of member of the
 Government (employer (government) – employee board;
relationship) 1. Neglect of duty or incompetence
 Public accountancy ( Client – Service provider 2. Violation or tolerance of any violation of RA9298 and its
relationship) IRR
Note: 3. FINAL JUDGEMENT of crimes involving moral
 When the business has an annual revenue of AT LEAST turpitude
10,000, 000 pesos or has a paid-up capital of more than 4. Manipulation or rigging of the CPALE results
5,000,000 pesos, an accounting position or role are required Note: Only Philippine president has the power to remove
to be occupied by a duly registered CPA and suspend.
 The department chair or its equivalent must be duly Examination, Registration and Licensure
registered CPA when BSA program is being offered in  Qualifications of applicants for CPALE
college with other business course 1. Resident of the Philippines
Composition and Appointment process 2. Is of a good moral character
3. Is a BS Accountancy degree holder
4. Must not been convicted of any criminal offense
involving moral turpitude
 Scope of examination (current in RA 9298)
1. AFAR
2. Auditing
3. FAR
4. MAS
5. RFBT
6. Tax
Note: Subject to the approval of PRC, may revise or
exclude subjects and their syllabi, and add new ones as the
need arises. However, the changes shall not be more often
than once every three (3) years.
 Required ratings
1. General average of AT LEAST 75%
2. There should be no grades lower than 65%
3. To be considered as conditional, the MAJORITY of the
subjects should have grades of AT LEAST 75%, provided
that the candidates shall take an examination in the
remaining subjects with in two (2) years from the preceding
examination, provided further that if the candidate fails to
obtain AT LEAST GA of 75% and a rating of AT LEAST
65% in each of the subjects reexamined, he shall be
considered as failed in the entire examination.
 Registration of CPA
1. Certificate of Registration – primary proof of acceptance
in the accountancy profession with lifetime validity
2. Professional I.D. – immediate proof being a CPA that is
renewable every 3 years
3. Special or temporary permit - for foreign CPA called for
specific purpose, who is engaged as professor, lecturer or
critic, or who is an internationally recognized expert or
specialization
QUALITY CONTROL FOR FIRMS THAT PERFORM
AUDITS AND REVIEWS OF FINANCIAL
STATEMENTS, AND OTHER ASSURANCE AND
RELATED SERVICES ENGAGEMENTS
-Engagement quality control review- process designed to
provide an objective evaluation of the significant judgments
the engagement team made and the conclusions it reached
in formulating the report.
- Network – A larger structure:
(i) That is aimed at cooperation, and
(ii) That is clearly aimed at profit or cost-sharing or
shares common ownership, control or management,
common quality control policies and procedures, common
business strategy, the use of a common brand name, or a
significant part of professional resources.
-Professional standards – AASC Engagement Standards, as
defined in the AASC’s Preface to the Philippine Standards
on Quality Control, Auditing, Review, Other Assurance and
Related Services, and relevant ethical requirements.
*Elements of a System of Q.C
-creates policies and procedures to address:
a. Leadership responsibilities for quality within the firm
-promote an internal culture recognizing that quality is
essential in performing engagements
-any person or persons assigned operational responsibility
for the firm’s system of quality control has sufficient and
appropriate experience and ability, and the necessary
authority, to assume that responsibility
b. relevant ethical requirements
-Independence- which enable the firm to:
1. Communicate its independence requirements to
its personnel
2. Identify and evaluate circumstances and
relationships that create threats to independence, and to take
appropriate action or, if considered appropriate, to withdraw
from the engagement
.Shall require:
1. Engagement partners to provide firm with
relevant info’s about client engagements
2. Personnel to notify firm of threats to
independence; so that it can be (i) readily determined, (ii)
update records, (iii) take appropriate action
.atleast annually, shall obtain written confirmation of
compliance with the policies about independence
.Establish policies and procedures:
1. Setting out criteria for determining need for
safeguards to reduce familiarity threat
2. Requiring the rotation of the engagement partner
responsible for the Q.C review
c. Acceptance and continuance of client relationship and
specific engagements
.Continue where the firm:
1. is competent to perform engagement and has
capabilities
2. can comply with ethical requirements
3. has considered the integrity of the client
.Policies requires:
1. obtain such info’s before accepting an
engagement with new client
2. if there’s potential conflict of interest,
determine whether it is appropriate to accept
engagement
3. if issues are identified, firm should document
how these issues were resolved
.Information haven’t been found earlier which would cause
decline of engagement. Policies shall include:
1. professional and legal responsibilities that apply
to the circumstances
2. possibility of withdrawing from the engagement
and client relationship
d. Human resources
1. perform in accordance with professional
standards and regulatory and legal requirements
2. enable firm to issue reports appropriated in the
circumstances
-Assignment of engagement teams
.Requiring that:
1. identity and role of E.P are communicated to
key members of client mngt.
2. Has competences, capabilities and authority to
perform the role
3. Responsibilities are clearly defined and
communicated to the partner.
e. engagement performances
.Includes:
1. matters relevant to promoting consistency in the
quality of engagement performance
2. supervision responsibilities
3. review responsibilities
-be determined on the basis that work of less experienced
team members is reviewed by more experienced
engagement team members.
-Consultation –provide with reasonable assurances that:
1. Appropriate consultation takes place on difficult
matter
2. Sufficient resources are available
3. Nature and scope of, and conclusions are
documented and are agreed by both
4. Conclusions from consultations are implemented
-Engagement Q.C Review *()
1. require () for all audits of FS of listed entities
2. Set out criteria which all other audits and reviews
of historical financial info shall be evaluated
3. Require () for all engagements, meeting the
criteria established
-Engagement report should not be dated until the
completion of the ()
-Should include:
1. Discussion of significant matters with
engagement partner
2. Review of the FS or other subject matter info and
proposed report
3. Review of selected engagement documentation
relating to significant judgement the team made and the
conclusion it reached
4. Evaluation of conclusion reached
-Considered the ff:
1. Team’s evaluation of firm’s independence in
relation to specific engagement
2. Whether appropriate consultation has taken place
on matters involving differences of opinions or other
difficult matters, and conclusions thereof
3. Whether documentation selected for review
reflects work performed
Criteria for Eligibility of ()
.Through:
1. Technical qualifications required to perform the
role including necessary experience and
authority
2. Degree to which () can be consulted without
compromising reviewer’s objectivity
. Maintain objectivity of ()
. Shall provide for the replacement of () where reviewer’s
ability may be impaired
Documentation of ()
1. Procedures have been performed
2. Review has been completed on or before date
of report
3. Reviewer is not aware of any unresolved
matters that would cause to believe that
significant judgement of the team made and
conclusions weren’t appropriate
Difference of Opinion
-shall establish policies for dealing it
1. conclusions reached be documented and
implemented
2. report not be dated until matter is resolved
Engagement Documentation
-Completion of the Assembly of Final Engagement Files
(complete it on a timely basis after reports have been
finalized)
-Confidentiality, Safe Custody, Integrity, Accessibility, and
Retrievability of the Engagement Documentation
-Retention of Engagement Documentation
f. monitoring
-Monitoring the Firms Q.C Policies and Procedures (must
be relevant, adequate and operating effectively)
1. Include an ongoing consideration and evaluation
of firm’s system of QC, including inspection of one
completed engagement for each partner
2. Require responsibility for monitoring process to
be assigned to each partner with sufficient knowledge and
experience
3. Require those performing engagements and
reviewer are not involved in inspecting engagements
-Evaluating, Communicating and Remedying Identified
Deficiencies (determine)
1. Instances that do not necessarily indicate firm’s
system of Q.C is insufficient to provide it with reasonable
assurance that it complies with professional standards
2. Systemic, repetitive or other significant
deficiencies requiring prompt corrective action
. Shall communicate it to relevant partners and the
recommendations for remedial act (which incudes)
1. Taking appropriate remedial act
2. Communication of the findings to those
responsible for training and professional
development
3. Changes to QC policies and procedures
4. Disciplinary action against those who fail to
comply, esp. those do so repeatedly.
-Firm shall communicate at least annually the results of the
monitoring, including:
1. Description of the monitoring procedures
performed
2. Conclusion drawn
3. where relevant, description of systemic,
repetitive or other significant deficiencies and of the actions
taken to resolved it.
-Some firms operate as part of networks and operate under
common monitoring policies. It shall require:
1. Atleast annually, network communicate overall
scope, extent and results of monitoring process to
appropriate individuals within network
2. communicate any identified deficiencies
-Complaints and Allegations (deals with)
1. work performed fails to comply with professional
standards and regulatory and legal requirements
2. non-compliance with firm’s system of QC
. Shall establish clearly defined channels for firm personnel
to raise their concerns.
-Documentation of the System of QC
. Require appropriate documentation to provide evidence of
operation of each element of its system
. Require retention of documentation for a period of time
sufficient to permit those perform monitoring procedures to
evaluate firms’ compliance
. requiring documentation of complaints and allegation and
the responses to them.
*Application
-PSQC does not call for compliance with requirements that
are not relevant in circumstances of sole practitioner with
no staff.
-Documentation and communication of policies for smaller
firms may be less formal and extensive than for larger ones.
Leadership Responsibilities for quality within the firm
-Promotion of quality-oriented internal culture depends on
clear, consistent and frequent actions and messages from all
levels of firm’s management:
1. perform work that complies with professional
standards and regulatory legal requirements
2. issue reports appropriated in the circumstances.
-These actions and messages be communicated (trainings,
seminars, newsletters, memoranda etc.)
-Should recognize that firm’s business strategy is subject to
overriding requirement for firm to achieve quality in all
engagement. Internal culture includes:
1. Establishment of policies that address performance
evaluation to its personnel
2. Assignment of management responsibilities
3. Provision of sufficient resources for development and
support of Q.C
Relevant Ethical Requirements
Philippine Ethics Code includes
1. Integrity
2. Objectivity
3. Professional competence and care
4. Confidentiality
5. Professional Behavior
-Reinforced by:
1. Leadership of the firm
2. Education and training
3. Monitoring
4. Process for dealing with non-compliance
Written Confirmation
-May be in paper or electronic form
Familiarity threat
-nature of engagement, extent to which it involves a matter
of public interest
-length of service of senior personnel on engagement
Considerations specific to public sector audit
organizations
-Public sector entity is significant for the purpose of
expanded Q.C procedures
Acceptance and Continuance of Client Relationship and
Specific Engagements
Competence, Capabilities and Resource
-Personnel have knowledge of relevant industries or subject
matter
-have experience with relevant regulatory requirements, or
ability to gain necessary skills and knowledge effectively
-sufficient personnel with competence and capabilities
-experts are available
-meeting criteria and eligibility requirements to perform
engagement Q.C review
-able to complete engagement within reporting deadline.
Integrity of client
-identity and business reputation of clients owner/mngt
-nature of operations and business practices
-information about attitude of client towards internal control
environment
-Whether maintaining firm’s fees as low as possible
-indication of inappropriate limitation in scope of work
-indications that client is involved in money laundering or
other criminal activities
-reason for proposed appointment of firm and non-
reappointment of the previous firm.
-identity and business reputation of related parties.
*sources of information may include:
-Communication with existing or previous servers, and
discussions with other parties
-Inquiry of personnel and 3rd Parties
-Background searches of relevant databases
Withdrawal
--Discussing appropriate action that firm might take based
on relevant facts or circumstances
-If appropriate to withdraw, discuss the reason for it
-Consider where legal requirement for firm to remain in
place, or report th withdrawal; together with the reasons for
withdrawal, to regulatory authorities
-documenting significant matters, consultations,
conclusions and basis
Human Resource
-for recruitment, performance evaluation, capabilities,
competence, career development, promotion, compensation
and estimation of personal needs.
Competence- gain through: Professional education,
professional development, work experience, coaching by
more experienced staff, independence education
Engagement Teams- consideration of:
-understanding of, and practical experience with,
engagement of similar nature and complexity through
trainings
- professional standards and regulatory and legal
requirements
-Technical knowledge and expertise
-Knowledge of relevant industries
-Ability to apple professional judgement
-understanding of firm’s QC policies.
Engagement Performance
-Consistency in Q of E.P (through policies and procedures)
-Supervision (Tracking progress, Considering competence
and capabilities, Addressing significant matters arising
during, Identifying matters for consultation by more
experienced team)
-Review
-Consultation (discussion, documentation)
*Engagement Quality Control Review
Criteria:
1. Nature of engagement, including extent of matter
of public interest
2. Identification of unusual circumstances or risks in
engagement
3. Whether laws or regulations require engagement
QC review.
Nature, Timing and Extent of EQCR
The engagement report is not dated until the
completion of the engagement quality control review.
However, documentation of the engagement quality
control review may be completed after the date of the
report.
Conducting review in a timely manner at
appropriate stage.
Extent may depend on complexity of
engagement. The performance of EQCR doesn’t reduce
the responsibilities of the engagement partner.
EQCR of Listed Entity
Significant risks identified during the engagement and
the responses to those
risks.
• Judgments made, particularly with respect to materiality
and significant risks.
• The significance and disposition of corrected and
uncorrected misstatements
identified during the engagement.
• The matters to be communicated to management and
those charged with
governance and, where applicable, other parties such as
regulatory bodies.
Criteria for Eligibility of EQCR
-Sufficient and Appropriate Technical expertise,
experience and authority
-consultation with EQCR
-Objectivity of EQCR
 Where practicable, is not selected by the
engagement partner;
 Does not otherwise participate in the engagement
during the period of review;
 Does not make decisions for the engagement
team; and
 Is not subject to other considerations that would
threaten the reviewer’s objectivity.
Difference of Opinion
-Effective procedures encourage identification of
differences of opinion at early stage
-May include consulting another practitioner or firm
Engagement Documentation
-Completion of the Assembly of Final Engagement Files
(may prescribe time limit per each report issued in respect
of subject information of an entity.)
-Confidentiality, safe custody, integrity, accessibility and
retrievability of engagement documentation
*implements to avoid unauthorized alteration or loss of
engagement documentation may include those that:
• Enable the determination of when and by whom
engagement documentation was created, changed or
reviewed;
• Protect the integrity of the information at all stages of
the engagement, especially when the information is
shared within the engagement team or transmitted to
other parties via the Internet;
• Prevent unauthorized changes to the engagement
documentation; and
• Allow access to the engagement documentation by the
engagement team and other authorized parties as
necessary to properly discharge their responsibilities.
*Controls that the firm designs and implements to
maintain the confidentiality:
• The use of a password among engagement team
members to restrict access to electronic engagement
documentation to authorized users.
• Appropriate back-up routines for electronic engagement
documentation at appropriate stages during the
engagement.
• Procedures for properly distributing engagement
documentation to the team members at the start of the
engagement, processing it during engagement, and
collating it at the end of engagement.
• Procedures for restricting access to, and enabling proper
distribution and confidential storage of, hardcopy
engagement documentation.
*Require engagement teams to:
• Generate scanned copies that reflect the entire content
of the original paper documentation, including manual
signatures, cross-references and annotations;
• Integrate the scanned copies into the engagement files,
including indexing and signing off on the scanned copies
as necessary; and
• Enable the scanned copies to be retrieved and printed as
necessary
-Retention of Engagement Documentation (vary with the
nature of engagement and firm’s circumstances)
*Ordinarily be no shorter than 7yrs from date of auditor’s
report
-Ownership of engagement documentation (property of the
firm, generally)
Monitoring
Evaluation of the system of QC includes:
• Analysis of:
o New developments in professional standards and
regulatory and legal requirements, and how they are
reflected in the firm’s policies and procedures where
appropriate;
o Written confirmation of compliance with
policies and procedures on independence;
o Continuing professional development,
including training; and
o Decisions related to acceptance and
continuance of client relationships and specific
engagements.
• Determination of corrective actions to be taken and
improvements to be made in the system, including the
provision of feedback into the firm’s policies and
procedures relating to education and training.
• Communication to appropriate firm personnel of
weaknesses identified in the system, in the level of
understanding of the system, or compliance with it.
• Follow-up by appropriate firm personnel so that
necessary modifications are promptly made to the quality
control policies and procedures.
-Inspection cycle policies may specify cycle that spans
3yrs. Depending on the factors such as:
• The size of the firm.
• The number and geographical location of offices.
• The results of previous monitoring procedures.
• The degree of authority both personnel and offices have
• The nature and complexity of the firm’s practice and
organization.
• The risks associated with the firm’s clients and specific
engagements.
Communicating Deficiencies (need not include
identification of specific engagement concerned)
Complaints and allegations
-source- may originate within and outside firm
-investigation policies and procedures
• Has sufficient and appropriate experience;
• Has authority within the firm; and
• Is otherwise not involved in the engagement.
Documentation of System of QC
-form and content includes: size of firm and number of
offices, nature and complexity of firm
-Appropriate documentation
• Monitoring procedures, including the procedure for
selecting completed engagements to be inspected.
• A record of the evaluation of:
o Adherence to professional standards and
regulatory and legal requirements;
o Whether the system of quality control has been
appropriately designed and effectively implemented; and
o Whether the firm’s quality control policies and
procedures have been appropriately applied, so that
reports that are issued by the firm or engagement partners
are appropriate in the circumstances.
• Identification of the deficiencies noted, an evaluation of
their effect, and the basis for determining whether and
what further action is necessary.
Fraud Triangle Theory
-explains the factors that lead to fraud and other unethical
behavior.
Three factors:
1. Pressure: can include money problems, debts,
addiction and bills. Greed can also be one, but
it usually needs to be associated with injustice.
2. Opportunity: arises where there is a chance to
commit act without high chance of getting
caught.
3. Rationalization: mindset of a person to commit
unethical acts, manages to justify what he is
about to do.
Using the Fraud Triangle
-to analyze the vulnerability to fraud, provides a way
to avoid being victimized.
Relieve pressure- working to relieve these issues can
help prevent criminal behavior
Minimize opportunity- review internal control and
address current or future vulnerabilities.
Target Rationalization- shall create zero tolerance
policy towards fraudulent behavior.
Rationalizing Fraud
-Research shows that individuals who behave
unethically usually experience guilt or discomfort
before committing deviant act, and try to reduce it
through rationalization.
Thinking Like a Crook- Regulators instruct auditors to
pay attention to some factual clues, such as “behavior
indicating displeasure or dissatisfaction with the
company or its treatment of the employee,” without an
explanation of why and how such clues relate to
fraudsters’ rationalizations.
This same criticism has been leveled at COSO’s
Integrated Framework. Principle 8 under the “Risk
Assessment” component instructs executives to
explicitly consider fraud risk potential and assess
rationalization; however, COSO provides few
examples of potential fraud rationalizations and does
not link them directly with relevant antifraud
procedures.
 AUDITING APPLICATION
Taking the risk out of risk assessment