Ch 09 Fraud risk

Auditors’ objectives.

Chapters 5 to 12.

Through confirmation and analytical procedures.

Fraud risk, internal controls, and control risk.

They can create opportunities for fraud.

Risk assessment and internal control.

Overstatement or understatement of earnings/net worth.

To design the overall audit strategy.

It reduces the number of shares needed to make the purchase.

Conditions include perceived pressure, opportunity to commit fraud, and rationalization by the perpetrator.

Audit of specific account/cycle.

To raise the stock price and reduce the cost of acquisition.

Lack of segregation of duty of key functions.

Inherent risk, internal control risk, and risk of material misstatement.

To ensure the accuracy and reliability of financial statements.

It often has a material impact.

Factors that increase the risk of fraud for each of the three conditions in the Fraud Triangle.

Misappropriation of assets refers to the theft or misuse of an organization's resources for personal gain.

To develop procedures to detect fraud.

Opportunity, Pressure, and Rationalization.

No, they follow auditing standards in assessing and responding to fraud risks but do not proactively search for fraud.

Stealing cash on hand.

Association of Certified Fraud Examiners.

To implement effective detection procedures.

Top-side adjustment entries.

Fraudulent financial reporting and asset misappropriation.

By analyzing trends and discrepancies in financial statements.

Through journal entries for fictitious customers.

Intentional misstatement or omission in financial statements.

It allows goods to be delivered without transferring ownership, making returns easier.

Bonus/value of stock-based compensation, such as stocks and stock options.

Auditors’ objectives.

More frequent than fraudulent reporting but has a smaller impact per case on financial statements.

The auditing profession.

Costs of goods sold.

Existence and occurrence.

A pattern of unethical financial practices.

A practice where more goods are shipped to a distributor than they can sell, inflating revenue figures.

Fraud Risk Type: Opportunity; Component: M (Management Override).

Meiling Zhao.

Assessing Fraud Risk.

Revenue recorded without attributing it to specific customers.

To provide insights and statistics on fraud trends and prevention.

Fraud Risk Type: Fraud; Component: R/A (Risk Assessment).

An intentional misstatement of financial statements.

Attitudes/Rationalization, Opportunities, and Incentives/Pressures.

ACCT 4131.

Recognizing revenue before it is earned, often through practices like channel stuffing.

The ability to commit fraud due to weak internal controls or oversight.

The Worldcom case.

It is more common than fictitious revenue.

Inspection of shipping documents.

Justification of wrongdoing and attitudes of top management toward financial reporting.

Opportunity, pressure, and rationalization.

Fraudulent financial reporting and misappropriation of assets.

Revenue and accounts receivable.

Procedures to detect fraud.

Because even a small manipulation (e.g., 1%) can make a big difference in the largest amounts.

Fictitious sales.

The motivation or incentive to commit fraud, often due to financial difficulties or personal issues.

They do not assume that their client conducts fraud unless there is a warning sign.

Compensation contracts or career concerns tied to earnings performance.

An additional agreement allowing customers unrestricted returns and waiving immediate payment obligations.

The process by which individuals justify their fraudulent actions to themselves.

Involves theft of an entity’s assets.

Fraud is an intentional act of deception to secure unfair or unlawful gain.

Fraudulent financial reporting involves the intentional misstatement or omission of financial information to deceive users.

Intentional misstatements or omissions in financial statements.

The Chinese University of Hong Kong.

Sales and revenue fraud.

Incentive/pressure.

Material fraud occurs infrequently despite high-profile examples; most auditors never encounter one in their career.

Bill and holds, where goods are invoiced before they are shipped.

The auditing profession.

Management.

Lack of commitment to high financial reporting quality.

Opportunities.

Side-agreement fraud.

Because the goods are actually delivered, making it less obvious.

Living beyond means or financial difficulties.

Risk assessment and internal control.

Analytical procedures to look for patterns of sales.

Fraud Risk Type: Fraud; Component: I (Incentives).

To assess the risk of material misstatements due to fraud.

The same for error and fraud.

The theft or misuse of an organization's assets.

Recognizing revenue before it is earned as defined by GAAP.

Fraudulent financial reporting focuses on misleading financial statements, while misappropriation of assets involves direct theft or misuse of assets.

They provide a mindset that justifies fraudulent behavior.

Chapters 5 to 12.

It can have a direct and significant impact.

To verify sales timing and occurrence, and accounts receivable cutoff and existence.

They provide the means for individuals to commit fraud.

Weak internal controls, financial pressures, and personal justification.

An invoice but not a shipping document.

Fraud is the intentional act of deceiving others for personal gain.

Factors that motivate individuals to commit fraud.

Frequent related party transactions.

The auditor should make further investigation.

Fraudulent financial reporting involves misleading financial statements, while misappropriation of assets involves theft or misuse of an organization's resources.

By integrating fraud risk analysis with the assessment of other risk factors.

Both employees and executives, usually at lower levels of the organization hierarchy.

Because it can significantly affect the accuracy of financial statements.

Meeting analyst forecasts, investor expectations, or debt covenant provisions.

Inherent risks and internal control risks.

As a tool to achieve business goals.

It is involved in determining accounting numbers, which can create opportunities for fraud.

Claiming reimbursement for personal expenses as if they were business-related.

Inadequate security of IT.

It can weaken oversight and create opportunities for fraud.

The three components are opportunity, pressure, and rationalization.

It is integrated into the assessment of inherent risk (IR) and control risk (CR).

By omitting accounts payable and other liabilities.

Large amounts of sales before year-end followed by large amounts of sales returns after year-end.

A type of misappropriation where funds are wrongfully disbursed.

To design the overall audit strategy.

To help prevent and detect fraud risks.

To detect material misstatements due to fraud.

Fraud risk and internal controls.

Specific fraud risk areas include revenue recognition, management override of controls, and related party transactions.

To critically assess evidence and remain alert to conditions that may indicate possible fraud.

It can create opportunities for fraud due to lack of oversight.

Financial pressure and dissatisfaction against the employer.

Auditors are responsible for detecting material misstatements due to fraud during their audits.

Fraudulent activities or intentional misrepresentation of financial information.

Errors or omissions in financial statements that could influence the economic decisions of users.

Completion of audit and audit report.

The sales may show fluctuations or trends over the months.

Capitalized billions of dollars as fixed assets that should have been expensed.

It weakens internal controls, creating opportunities for fraud.

Using a company vehicle for personal purposes.

It may indicate issues with product quality or customer satisfaction.

It serves as a mechanism to mitigate fraud risk.

Completion of audit and audit report.

It helps identify trends, potential fraud, or operational issues.

Creating ghost employees to receive payments fraudulently.

Possible market problems or ineffective sales strategies.

Inadequate disclosure of obligations to affiliates known as special-purpose entities.

They can guide inventory management, marketing strategies, and resource allocation.

Audit of specific account/cycle.

Procedures include analytical procedures, inquiries of management, and testing of internal controls.