fraud auditing

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

Group 3ESA RESTU K (1210534001)

ATIKAH GALUH W (1210534013)SITI OKTARINA N (1210534014)M. IRHAS ERVAN (1210534027)

Fraud Auditing

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 11 - 11 - 22

Learning Objective 1

Define fraud and distinguish between fraudulent financial

reporting and misappropriation of assets.


Types of Fraud

Fraudulent financial reporting

Misappropriation of assets

Management Fraud



Describe the fraud triangle and identify conditions for fraud.


The Fraud Triangle

Incentives/Pressures

Opportunities Attitudes/Rationalization


Why Fraud Occurs


Examples of Risk Factorsfor Fraudulent Reporting

Financial stability or profitability is threatened byeconomic, industry, or entity operating conditions

Excessive pressure exists for management tomeet debt requirements

Personal net worth is materially threatened

Incentives/Pressures:



There are significant accounting estimates thatare difficult to verify

There is ineffective oversight over financialreporting

High turnover or ineffective accounting, internalaudit, or information technology staff exists

Opportunities:



Inappropriate or inefficient communicationand support of the entity’s values is evident

A history of violations of laws is known

Management has a practice of makingoverly aggressive or unrealistic forecasts

Attitudes/Rationalization:


Examples of Risk Factorsfor Misappropriation of Assets

Personal financial obligations create pressureto misappropriate assets

Adverse relationships between managementand employees motivate employees tomisappropriate assets

Incentives/Pressures:



There is a presence of large amounts of cashon hand or inventory items

There is an inadequate internal control overassets

Opportunities:



Disregard for the need to monitor or reducerisk of misappropriating assets exists

There is a disregard for internal controls

Attitudes/Rationalization:



Understand the auditor’s responsibility for assessing the

risk of fraud and detecting material misstatements due to

fraud.


Assessing the Risk of Fraud

SAS 99 provides guidance to auditorsin assessing the risk of fraud.

SAS 1 states that, in exercising professionalskepticism, an auditor “neither assumes thatmanagement is dishonest nor assumesunquestioned honesty.”


Sources of Information Gatheredto Assess Fraud Risks


Documenting Fraud Assessment

Discussion among engagement team Procedures performed to assess risk Specific risks and audit response Reasons supporting conclusions Other conditions and analytical relationships Nature of communications



Identify corporate governance and other control environment factors

that reduce fraud risks.


Corporate Governance Oversightto Reduce Fraud Risks

1. Culture of honesty and high ethics

2. Management's responsibilityto evaluate risks of fraud

3. Audit committee oversight


Example Elements for a Code of Conduct

Organizational code of conduct

General employee conduct

Conflicts of interest

Outside activities, employment, and directorships



Relationships with clients and suppliers

Gifts, entertainment, and favors

Kickbacks and secret commissions

Organization funds and other assets



Organization records and communications

Dealing with outside people and organizations

Prompt communications

Privacy and confidentiality


Organizational Factors Contributing to Risk of Fraud



Develop responses to identified fraud risks.


Responding to the Risk of Fraud

Change the overall conduct of the auditto respond to identified fraud risks.

Design and perform audit proceduresto address fraud risks.

Design and perform procedures toaddress the risk of managementoverride of controls.



Recognize specific fraud risk areas and develop procedures to detect

fraud.


Specific Fraud Risk Areas

Inventory fraud risks

Revenue and accounts receivable fraud risks

Purchases and accounts payable fraud risks

Other areas of fraud risk


Effect of Fictitious Receivables on Accounting Ratios


Effect of Fictitious Inventory on Inventory Turnover



Understand interview techniques and other activities after fraud is

suspected.


Responding to Misstatements That May Be the Result of Fraud

When fraud is suspected, the auditor gathersadditional information to determine whetherfraud actually exists.


Initial Detection Method for Million-Dollar Schemes

Tip

By Accident

Internal Audit

Internal Controls

External Audit

Notified By Police

$1,000,000+

All Cases

0% 10% 20% 30%

40% 50%

Note: The sum of percentages in this chart exceeds 100 percent because in some cases respondents identified more than one detection method.

42.3%

46.2%

22.8%

20.0%

18.6%19.4%

16.7% 23.3%

15.8%9.1

%6.0%

3.2%

Type o

f D

ete

ctio

n


Types of Inquiry Techniques

Informational

Assessment

Interrogative

Evaluating responses

Listening

Observing behavioral cues


Observing Verbal Cues


Observing Non-Verbal Cues

©2012 Prentice Hall Business Publishing, ©2012 Prentice Hall Business Publishing, Auditing 14/e,Auditing 14/e, Arens/Elder/Beasley Arens/Elder/Beasley 5 - 5

End of Chapter 11

fraud auditing

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