AIN5 - Audit notes PDF

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Fraud theory & audit 1. The Fraud Act 2006 - A person is pledged guilty when he breaches – fraud by false representation, failing to disclose information, abuse of power 2. The Fraud Triangle (Cressey 1971) – pressure, opportunities, rationalisation – capability (position within the org, cognitive & behavioural abilities) – competence & arrogance (attitudes) 3. Pressure to commit fraud (motivation to commit fraud): I. Financial pressure – greed, living beyond means, bills & debt, personal financial loss, unexpected financial need, viability of business II. vices – gambling, drugs, alcohol, extra-marital III. work related – dissatisfaction, insufficient recognition, overlook for promotion, feel under-valued IV. other – show off, ego, power, control, influenced by other 4. Opportunities to commit fraud (to commit & conceal fraud): I. lack of internal controls for fraud prevention II. inability to judge the quality of performance III. lack of access to information IV. ignorance/incapacity to detect V. Failure to discipline fraud perpetrators VI. poor audit trails (a system to detect detailed transactions) 5. Examples of fraud: misappropriation of assets, embezzlement of assets & receipts, stealing (colluding), paying for goods not received (kickback payments, fictitious employees), fraudulent reporting (fictitious journal entries, inappropriate adjustment to assumptions and judgements, concealing information that would impact, altering records of unusual/significant transactions, omitting/delaying recognition, purposely misrepresenting complex transactions) 6. ISA 200 Overall objective of the independent auditor, and the conduct of an audit in accordance with ISA – the auditor needs to work with an attitude of PROFESSIONAL SCEPTICISM 7. Be wary on management assurance and explanation without convincing evidence – a questioning mind 8. ISA 240 The auditors’ responsibility relate to fraud in auditing of financial statement (used alongside with ISA 315 & 330 auditors’ responses to assessed risk) – to obtain reasonable assurance that the FS are free from MM, whether it is caused by errors (can be detected by internal control) or fraud 9. Objectives of auditors under ISA 240 I. To identify & assess the risks of MM of FS due to fraud II. To obtain sufficient appropriate AE regarding assessed risks of MM due to fraud by designing & implementing appropriate responses III. To respond appropriately to fraud/suspected fraud identified during the audit 13 Requirements of ISA 240 Apply professional scepticism, Discuss with engagement team, perform risk assessment procedures, management enquiry, evaluate unusual relationships, fraud risk factors, risk to material misstatements, respond, evaluate evidence, obtain written representation, stop, report, documentation

10.In audit, fraud as in fraud that causes MM to FS; auditors can suspect but not determine legally whether fraud has occurred 11. TCWG – responsibility to detect & prevent fraud – the opportunities in the fraud tri 12. ISA 315 Identifying and assessing the risks of material misstatement through understanding the entity and its environment – control environment [culture, attitude, awareness], risk management [assess, estimate, likelihood&impact, actions], control activities/control procedures [policies & procedures built into the accounting system], monitoring procedures [internal audit, management review] Organisational controls – every function should have specific person in charge, some plan in company to define and segregate duties, identify line of reporting upwards and downwards Authorisation and approval – budget? Physical controls – restricted access to warehouse, how do they use padlock/password to control access, hierarchical access to information Personnel – competent, how they monitor Arithmetical procedures – reconciliation, control account in place? Regarding calculation Management (the style) – senior managers are there to monitor daily control activities Information processing, segregation of duties, authorisation, reconciliation, physical control, supervision & review 13. Brydon report – auditors are not doing enough works to detect material fraud (ISA 240)

overall responsibilities (assurance & true fair view), duties (AE & respond) & objectives (list of tasks) of an auditor – include suspicion in

Embezzlement: theft or misappropriation of funds placed in one's trust or belonging to one's employer...