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FINALS EXAMINATION
- Errors are unintentional mistakes arising from negligence or oversight, while fraud involves
deliberate actions with the intent to deceive or manipulate for personal gain or harm. Errors are
typically accidental and can be rectified, while fraud is intentional and can result in severe
consequences.
2. Distinguish between fraudulent financial reporting and misappropriation of assets. Discuss the
likely difference between these two types of fraud on the fair presentation of financial
statements.
3. Define and illustrate “kiting”. What controls should the client institute to prevent it?
- "Kiting" refers to the fraudulent practice of artificially inflating the balance of a bank account by
utilizing the time it takes for checks to clear. It involves creating a series of transactions between two
or more bank accounts, where funds are moved back and forth to give the appearance of a higher
balance than what is actually available.
Day 1: John has two bank accounts, Account A and Account B. Account A has a balance of 100, and
Account B has a balance of 50.
John writes a check for 200 from Account A and deposits it into Account B. Account A's balance
appears to be -100, and Account B's balance becomes 250.
John then writes a check for 300 from Account B and deposits it back into Account A. Account A's
balance now appears to be 200, and Account B's balance becomes -50.
To prevent kiting and safeguard against fraudulent activities, They need to implement strong
internal controls wherein clients should establish robust internal controls, such as segregation of
duties, dual authorization for significant transactions, and periodic reconciliations of bank accounts.
These measures help detect irregularities and discourage fraudulent activities.
4. What is meant by control environment? What are the factors the auditor must evaluate to
understand it?
- Control environment means the overall attitude, awareness, and actions of directors and
management regarding the internal control system and its importance in the entity. The auditor
must evaluate the different factors such as the function of the board of directors and its committees,
the philosophy and operating style of management, the entity’s organizational structure and
methods of assigning authority and responsibility, and the control system of management.
5. The separation of operational responsibility from record keeping is meant to prevent different
types of misstatements than the separation of the custody of assets from accounting. Explain the
difference in the purposes of these two types of separation of duties.
-Separation of operational responsibility from record keeping is intended to reduce the likelihood of
operational personnel biasing the results of their performance by incorrectly reading information
while separation of the custody of assets from accounting for these assets is intended to prevent
misappropriation of assets and also to prevent fraud.