Aud15 PPT 11 Ge

Chapter
Chapter11
11
Considering
Consideringthe
the
Risk
Riskof
ofFraud
Fraud
Copyright © 2014 Pearson Education

Define fraud and distinguish between
fraudulent financial reporting and
misappropriation of assets.
Describe the fraud triangle and identify
conditions for fraud.
Understand the auditor’s responsibility for
assessing the risk of fraud and detecting
material misstatements due to fraud.
Prepare the post-closing trial balance
11-2
Identify corporate governance and other
control environment factors that reduce
fraud risks.
Develop responses to identified fraud risks.
Recognize specific fraud risk areas and
develop procedures to detect fraud.
Understand interview techniques and other
activities after fraud is suspected.
11-3
1
Define fraud and distinguish
between fraudulent financial
reporting and misappropriation of
assets.
11-4
Management
Fraud
Fraudulent
Misappropriation
financial
of assets
reporting
11-5
2
Describe the fraud triangle and identify conditions
for fraud.
11-6
Incentives/Pressures
Opportunities Attitudes/Rationalization
11-7
11-8
Incentives/Pressures:
 Financial stability or profitability is threatened by
economic, industry, or entity operating conditions
 Excessive pressure exists for management to

meet debt requirements
 Personal net worth is materially threatened
11-9
Opportunities:
 There are significant accounting estimates that
are difficult to verify
 There is ineffective oversight over financial

reporting
 High turnover or ineffective accounting, internal

audit, or information technology staff exists
11-10
Attitudes/Rationalization:
 Inappropriate or inefficient communication
and support of the entity’s values is evident
 A history of violations of laws is known
 Management has a practice of making

overly aggressive or unrealistic forecasts
11-11
Incentives/Pressures:
 Personal financial obligations create pressure
to misappropriate assets
 Adverse relationships between management

and employees motivate employees to
misappropriate assets
11-12
Opportunities:
 There is a presence of large amounts of cash
on hand or inventory items
 There is an inadequate internal control over

assets
11-13
Attitudes/Rationalization:
 Disregard for the need to monitor or reduce
risk of misappropriating assets exists
 There is a disregard for internal controls
11-14
3
Understand the auditor’s responsibility for
assessing the risk of fraud and detecting material
misstatements due to fraud.
11-15
Auditing standards provide guidance to
Auditors in assessing the risk of fraud.
Auditing standards state that, in exercising

Professional skepticism, an auditor
“neither assumes that management is
dishonest nor assumes unquestioned honesty.”
11-16
11-17
 Discussion among engagement team
 Procedures performed to assess risk
 Specific risks and audit response
 Reasons supporting conclusions
 Results of procedures performed
 Other conditions and analytical
relationships
 Nature of communications
11-18
4
Identify corporate governance and
other control environment factors
that reduce fraud risks.
11-19
1. Culture of honesty and high ethics
2. Management's responsibility
to evaluate risks of fraud
3. Audit committee oversight
11-20
 Organizational code of conduct
 General employee conduct
 Conflicts of interest
 Outside activities, employment, and

directorships
11-21
 Relationships with clients and suppliers
 Gifts, entertainment, and favors
 Kickbacks and secret commissions
 Organization funds and other assets
11-22
 Organization records and communications
 Dealing with outside people and

organizations
 Prompt communications
 Privacy and confidentiality
11-23
11-24
5
Develop responses to identified
fraud risks.
11-25
Change the overall conduct of the audit
to respond to identified fraud risks.
Design and perform audit procedures

to address fraud risks.
Design and perform procedures to

address the risk of management
override of controls.
11-26
6
Recognize specific fraud risk areas and
develop procedures to detect fraud.
11-27
 Revenue and accounts receivable fraud risks
 Inventory fraud risks
 Purchases and accounts payable fraud risks
 Other areas of fraud risk
11-28
11-29
11-30
7
11-31
11-32
Informational
Assessment
Listening
Evaluating
responses
Interrogative
Observing
behavioral cues
11-33
11-34
11-35
11-36
Copyright
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stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
11-37

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Chapter

Copyright © 2014 Pearson Education

 Excessive pressure exists for management to

 Personal net worth is materially threatened

 There is ineffective oversight over financial

 High turnover or ineffective accounting, internal

 A history of violations of laws is known

 Management has a practice of making

 Adverse relationships between management

 There is an inadequate internal control over

 There is a disregard for internal controls

Auditing standards state that, in exercising

3. Audit committee oversight

 General employee conduct

 Outside activities, employment, and

 Gifts, entertainment, and favors

 Kickbacks and secret commissions

 Organization funds and other assets

 Dealing with outside people and

 Privacy and confidentiality

Design and perform audit procedures

Design and perform procedures to

 Inventory fraud risks

 Purchases and accounts payable fraud risks

 Other areas of fraud risk

All rights reserved. No part of this publication may be reproduced,

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