p4- fraud and error

7/31/2019 P4- Fraud and Error

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Chapter 4:

Fraud and Error


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Part 4 objectives

Distinguishes fraud and error and describe2 types of fraud that relevant to the auditor;

Describes the responsibilities of

management of the entity and auditors forfraud and error

Procedures when there is an indicate that

Fraud & Error may exit Reporting of Fraud & Error


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Fraud and error

Misstatement in FSs arise from fraud and

error

The reactions of auditor to misstatement

caused by fraud and error are different


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Error

Error: refers to an unintentional

misstatement in FSs, including the omission

of an amount or a disclosure, such as:

A mistake in gathering or processing datafrom which FSs are prepared.

An incorrect accounting estimate arisingfrom oversight or misinterpretation of facts.

A mistake in the application of accountingprinciples relating to measurement,

recognition, classification, presentation or

disclosure.


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Fraud

Fraud: refers to an intentional actby one or

more individuals among management,

those charged with governance, employees,

or third parties, involving the use of

deception to obtain an unjust or illegaladvantage

Fraud involving management is referred to

as management fraud;

Fraud involving only employees of entity

is referred to employee fraud


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Fraud

2 types of Fraud

- Fraudulent Financial reporting

- Misappropriation of assets


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Fraud- Fraudulent Financial Reporting

Involves intention misstatements including

omissions of amounts or disclosures in

financial statements to deceive financial

statement users

- Manipulation accounting records or

supporting documentation from which FS

are prepared.

- Misrepresentation in events, transactions or

other significant info.

- Intentional misapplication of acc principles


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Fraud- Fraudulent Financial Reporting

Involves management override (khng

nghe theo) of controls that otherwise may

appear to be operating effectively.

Cause from:

- Management earning;

- Pressures and incentives: pressures to meet

market expectations or a desire to

maximize compensation based on

performance


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Fraud- Misappropriation of assets

Misappropriation (s tham ) of assetsinvolves the theft of an entitys assets andis often perpetrated ( gy ra) by employees

in relatively small and immaterial (vn vt)amounts.

E.g.:

- Embezzling (bin th, tham ) receipts

- Stealing physical assets;

- Using an entitys assets for personal use

- .


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Responsibilities of those Charged wit

Governance and of Management

The responsibility for the prevention,

detection and handling of fraud and error

through the implementation and continuedoperation ofadequate accounting and

internal control systems.

Because of the inherent limitations of the

accounting and internal control systems, it

is impossible to eliminate the possibility of

fraud and error.


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Responsibilities of the Auditor and th

Audit Firm

The auditor and the audit firm are to assist

the client entity in detecting, handling and

deterring fraud and error;

The auditor and the audit firm are not and

cannot be held responsible for theprevention of fraud and error in the client

entity.


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Inherent Limitations of an Audit

Owing to the inherent limitations of an

audit, there is an unavoidable risk that

some material misstatements of thefinancial statements will not be detected,

even though the audit is properly planned

and performed in accordance with ISAs.


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the use of judgment;

the use of testing;

the inherent limitations of internal control; the audit evidence available to the auditor

is persuasive rather than conclusive in

nature.


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The risk of not detecting a material

misstatement resulting from fraud is higher

than the risk of not detecting a materialmisstatement resulting from error

the risk of the auditor not detecting a

material misstatement resulting from

management fraud is greater than for

employee fraud


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Inherent Limitations of an Audit-

Professional Skepticism

Professional Skepticism??

The auditor should maintain an attitude of

professional skepticism throughout theaudit, recognizing the possibility that a

material misstatement due to fraud could

exist, notwithstanding the auditors pastexperience with the entity about the

honesty and integrity of management and

those charged with governance.


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Procedures when there is an indicatio

that Fraud or Error May Exist

If the auditor and the audit firm believe the

indicated fraud or error could have a

material effect on the FS

shouldperform appropriate modified or additional

procedures (thc hin quy trnh bsung/thm)

Discuss the matter with management in

case that additional procedures are not

dispelled the auditor suspicion.


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Reporting of Fraud and Error

To the Director, in cases:

- the auditor suspects fraud may exist, even if

the potential effect on the financial

statements has not been measured;

- fraud is found to exist; or

- significant error is found to exist.

Often, report the matter to a level in theorganization structure of the entity above

that responsible for the persons believed to

be implicated


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To Regulatory and Enforcement (s pbuc) Authorities:

- When frauds are raised as to the

involvement of the highest authority

- Confidential requirement

the auditor and the audit firm may need to

seek legal advice in advance in such

circumstances


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To users of the Audit Report on the

Financial Statements :

- Which audit report is prepared?

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