Individual assignment

Contemporary Issues of Auditing

Student: Tran Viet Tien

Class: Auditing 59B
Code: 11154398

Topic 3: The primary responsibility for the prevention and detection of fraud rests with
both those charged with governance of the entity and management, to minimize the risk
of fraud, through a combination of prevention, deterrence, and detection measures.

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Present three elements to prevent, deter, and detect fraud, and analyze their impact on

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the risk of fraud in financial statements. What do these three elements mean to the auditor

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in fraud risk assessment?

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Introduction
Periodically, the latest major enters the news while many entities sit back and observe,
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promising themselves that 'it couldn't happen here. But the fact is that fraud can happen
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anywhere. Although very comparatively few large frauds are reported in the newspapers,
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massive amounts are lost to all sorts of enterprises as a consequence of the high amount
of minor frauds perpetrated.
Surveys are carried out on a daily basis in an effort to quantify the true extent and cost of
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fraud to to industry and community. Findings vary, and it is difficult to obtain a complete
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picture as to the full extent of the issue, but these surveys all indicate that fraud is
prevalent within organisations and remains a serious and costly problem. The risks of
fraud may only be increasing, as we see growing globalisation, more competitive
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markets, rapid developments in technology, and periods of economic difficulty.

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Among other findings, the various surveys highlight that:

• organisations may be losing as much as 7% of their annual turnover as a result of fraud
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• corruption is estimated to cost the global economy about $1.5 trillion each year
• only a small percentage of losses from fraud are recovered by organisations
• a high percentage of frauds are committed by senior management and executives

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 • greed is one of the main motivators for committing fraud
• fraudsters often work in the fi nance function
• fraud losses are not restricted to a particular sector or country
• the prevalence of fraud is increasing in emerging markets.
Despite the serious risk that fraud presents to business, many organisations still do not
have formal systems and procedures in place to prevent, detect and respond to fraud.
While no system is completely foolproof, this document identifies measures entities can
implement to prevent, deter, and detect fraud. It discusses these measures in the context
of three fundamental elements. Broadly stated, these fundamental elements are:
1. Culture of honesty and high ethics
2. Management’s responsibility to evaluate risks of fraud

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3. Audit committee oversight

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But to make it clearer, we must first know some important information about fraud and

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why people commit to fraud.
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I. Fraud: its extent, patterns and causes
1. What is fraud?
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Fraud - An intentional act by one or more individuals among management, those charged
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with governance, employees, or third parties, involving the use of deception to obtain an
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unjust or illegal advantage.

2. Why do people commit to fraud?
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There is no single reason behind fraud and any explanation of it needs to take account of
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various factors. Looking from the fraudster’s perspective, it is necessary to take account
of:
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• motivation of potential offenders

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• conditions under which people can rationalise their prospective crimes away
• opportunities to commit crime(s)
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• perceived suitability of targets for fraud

• technical ability of the fraudster
• expected and actual risk of discovery after the fraud has been carried out

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 • expectations of consequences of discovery (including non-penal consequences such as
job loss and family stigma, proceeds of crime confi scation, and traditional criminal
sanctions)
• actual consequences of discovery.
A common model that brings together a number of these aspects is the Fraud Triangle.
This model is built on the premise that fraud is likely to result from a combination of
three factors: motivation, opportunity and rationalisation.
II. Content of three elements and their impact on the risk of fraud in
financial statement
1. Culture of Honesty and High Ethics
The most effective way to prevent and deter fraud is to implement antifraud programs

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andcontrols that are based on core values embraced by the company.

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• Setting the Tone at the Top: Honesty and integrity by management reinforces honesty

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and integrity by employees. According to the survey the CEO, CFO involved in fraud

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cases accounted for 80-90%, so this is a necessity to reduction risk of fraud in financial
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• Creating a Positive Workplace Environment: Wrongdoing occurs less frequently when
employees have positive feelings about their employer than when they feel abused,
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threatened, or ignored. When employees feel comfortable working, they tend to devote
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more than fraud, it might reduction fraud in financial statement

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• Hiring and Promoting Appropriate Employees: To prevent fraud, companies implement

screening policies and promote employees who are trustworthy.
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• Training: New employees should be trained about the company’s expectations of

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employees’ ethical behavior. Fraud awareness training should also be included.

• Confirmation: Employees should periodically confirm their responsibilities for
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complying with the code of conduct.

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• Discipline: Employees must know that they will be held accountable for failure to
follow the code of conduct. Enforcement of violations of the code sends the message that
compliance with the code is expected.
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It is the duty of the company to build a climate of integrity and good standards and to
express explicitly the appropriate actions and aspirations of each employee. Such a
culture is grounded in a clear collection of core principles (or value system) that provides
workers with a framework for how an company conducts its operations. It also helps an

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 organization to establish an legal system that includes (1) fraudulent financial reporting,
(2) misappropriation of assets, and (3) corruption as well as other issues.
As we said above about why people cheat, the main reason is motivation, opportunity,
rationalization. So if we make employees not feel like they want commit to fraud on
positive and fair environment, the risk of fraud in financial statements will be
significantly reduced.

2. Management’s Responsibility to Evaluate Risks of Fraud

Neither fraudulent financial reporting nor misappropriation of assets can occur without a
perceived opportunity to commit and conceal the act. Organizations should be proactive
in reducing fraud opportunities by (1) identifying and measuring fraud risks, (2) taking
steps to mitigate identified risks, and (3) implementing and monitoring appropriate

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preventive and detective internal controlsand other deterrent measures.

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• Identifying and Measuring Fraud Risks: Effective fraud oversight begins with
management recognition that fraud is possible and almost any employee is capable of it.

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Accordingly, management should develop a heightened "fraud awareness" and an
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appropriate fraud risk-management program, with oversight from the board of directors
or audit committee.
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• Mitigating Fraud Risks: Management is responsible for implementing controls to

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mitigate fraud risks. The risk of fraud in the financial statements may be reduced by
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implementing shared services centers to provide accounting services to multiple

segments, affiliates or geographic locations of an entity 's operations. A joint services
center could be less vulnerable to the influence of local business managers and more cost-
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effective measures for fraud detection.

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• Monitoring Fraud Prevention Programs and Controls: Management should periodically

evaluate antifraud programs and ensure controls are effective. Internal audit plays a key
role in monitoring. In particular, management should evaluate whether appropriate
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internal controls have been implemented in any areas management has identified as
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posing a higher risk of fraudulent activity, as well as controls over the entity's financial
reporting process. Because fraudulent financial reporting may begin in an interim period,
management also should evaluate the appropriateness of internal controls over interim
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financial reporting. Fraudulent financial reporting by upper-level management typically

involves override of internal controls within the financial reporting process. Fraudulent
financial reporting by lower levels of management and employees may be deterred or
detected by appropriate monitoring controls, such as having higher-level managers
review and evaluate the financial results reported by individual operating units or

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 subsidiaries. Unusual fluctuations in results of particular reporting units, or the lack of
expected fluctuations, may indicate potential manipulation by departmental or operating
unit managers or staff.
3. Audit Committee Oversight
The audit committee has primary responsibility to oversee the organization’s financial
reporting and internal control process.
The audit committee is a deterrent to fraud by senior management by:
• Direct reporting of key findings by internal auditors to the audit committee
• Periodic reports by ethics officers about whistleblowing
• Other reports about lack of ethical behavior or suspected fraud

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The Audit Committee also plays a crucial role in assisting the Board in the financial

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management process of the company to fulfill its supervisory obligations. The audit

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committee can also help assess the strengths of internal monitoring by the organization
and its potential to provide fraudulent financial reporting with information obtained in

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communications from independent auditors.
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III. Three elements mean to the auditor in fraud risk assessment
Audit risk assessment: Is the auditing and auditing firm determine whether the level of
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audit risk that may occur is high or low, including assessment of inherent risk, control
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risk and detection risk. Audit risks are identified before planning and before performing
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the audit.
These three element to prevent, deter, and detect fraud, it reduces control risk and
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inherent risk lead to detection risk will at the highest level. It cause, auditor increasing the
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number of sampled transactions for detailed testing to reduces detection risk. And do
more work in audit risk asessment.
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