[AUD] Errors Fraud illegal acts

Detection responsibility

1. Assess the risk of misstatement

  ongoing process, every phase of an audit

2. Design audit to provide reasonable assurance of detection of material misstatement

3. Excercise due care / evaluating results

    exercise due care, the proper degree of professional skepticism(questioning mind/ critical assessment)

        * professional skepticism

            - design additional auditing procedures to obtain more reliable evidence 

            - obtaining corroboration of mgt explanation through consultation with a specialist

            - 3rd P confirmation 

 

Reporting Responsibility

1. modify departure from GAAP

2. report to audit committee

3. GAGAS, consider other parties

 

Fraud

type

a. Fraudulent financial reporting(mgt fraud)

b. Misappropriation of assets

 

factor

inventive/ pressure: reasons to provided to commit the misrepresentation. when mgt is under pressure, from sources outside or inside the entity to achieve financial outcome. individual may have an incentive to misappropriate assets.

  - downgrading by credit rating agency

  - new accounting regulatory requirements: misstatements from fraudulent FR

  - promotions, compensation inconsistent with expectation: misappropriation of assets

 

opportunity: a circumstance that allows a misrepresentation to occur. individual believes IC can be overridden, easy to steal asset. ineffective IC, override of controls, control이 없거나 무너져서 기회가 생기는것

  - unusual related P T:  misstatements from fraudulent FR

  - significant bank accounts in tax-haven jurisdictions, no clear biz justification: misstatements from fraudulent FR

  - ineffective board of directors or audit committee oversight over IC: misstatements from fraudulent FR  

  - Large amounts of cash on hand or processed: misappropriation of assets

  - Lack of independent check: misappropriation of assets

  - fixed assets lack owenership identification

  

attitude/ rationalization: attitude> EE creates a mindset that justifies the misrepresentation, mgt's disregard for controls, or mgt overly aggressive attitude in meeting financial goals

  - Excessive int by mgt in maintaining or increasing the entity's stock price: misstatements from FR

  - failure of mgt to correct known deficiencies > mgt disregards controls: misstatements from FR

 

procedure

1) staff discussion: consider fraud risk factors, professional skepticism

2) obtain info: inquiries, analytical procedure

3) Identify risk: type, significance, Likelihood, pervasiveness

4) Assess the identified risk

5) Respond to the results of the assessment

   * if risk increases

     - overall: more experienced staff, attention to significant accounting policies, less predictable procedure

     - specifically ided risk: increase NTE

     - mgt override: examine adj JE, accounting estimate for biases, significant unusual transaction 

6) Evaluate audit evidence

     - lost of document > heighten risk of fraud

       ex) photocopy of vendor's invoice, lost documents for asset addition

7) Communicate about fraud

  mgt: all fraud

  audit committee: material fraud & mgt fraud

  information users: modification of opinion

8) Document consideration of fraud

*  no remedial action > withdraw

 

Illegal acts

Direct effect on FS	Indirect effect on FS
Design audit to reasonable assurance of MM	If specific info come sto attention> apply audit procedure

small illegal acts misstatement, may material effect on entire FS

possibility of illegal acts

- unauthorized, improperly recorded, or unrecorded T

- investigation by the government

   * if risk increases

     1) inquire mgt at the level above > consult with client's legal counsel or other specialists, apply additional procedures

     2) Consider the FS effect