Auditing and assurance services 14e by arens chapter 11

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Fraud Auditing Chapter 11 http://www.authorstream.com/shengv n/ ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 Learning Objective Define fraud and distinguish between fraudulent financial reporting and misappropriation of assets ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - Types of Fraud Management Fraud Fraudulent financial reporting ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Misappropriation of assets 11 - Learning Objective Describe the fraud triangle and identify conditions for fraud ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - The Fraud Triangle Incentives/Pressures Opportunities Attitudes/Rationalization ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - Why Fraud Occurs ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - Examples of Risk Factors for Fraudulent Reporting Incentives/Pressures:  Financial stability or profitability is threatened by economic, industry, or entity operating conditions  Excessive pressure exists for management to meet debt requirements  Personal net worth is materially threatened ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - Examples of Risk Factors for Fraudulent Reporting Opportunities:  There are significant accounting estimates that are difficult to verify  There is ineffective oversight over financial reporting  High turnover or ineffective accounting, internal audit, or information technology staff exists ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - Examples of Risk Factors for Fraudulent Reporting Attitudes/Rationalization:  Inappropriate or inefficient communication and support of the entity’s values is evident  A history of violations of laws is known  Management has a practice of making overly aggressive or unrealistic forecasts ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - Examples of Risk Factors for Misappropriation of Assets Incentives/Pressures:  Personal financial obligations create pressure to misappropriate assets  Adverse relationships between management and employees motivate employees to misappropriate assets ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 10 Example Elements for a Code of Conduct  Organization records and communications  Dealing with outside people and organizations  Prompt communications  Privacy and confidentiality ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 21 Organizational Factors Contributing to Risk of Fraud ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 22 Learning Objective Develop responses to identified fraud risks ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 23 Responding to the Risk of Fraud Change the overall conduct of the audit to respond to identified fraud risks Design and perform audit procedures to address fraud risks Design and perform procedures to address the risk of management override of controls ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 24 Learning Objective Recognize specific fraud risk areas and develop procedures to detect fraud ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 25 Specific Fraud Risk Areas  Revenue and accounts receivable fraud risks  Inventory fraud risks  Purchases and accounts payable fraud risks  Other areas of fraud risk ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 26 Effect of Fictitious Receivables on Accounting Ratios ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 27 Effect of Fictitious Inventory on Inventory Turnover ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 28 Learning Objective Understand interview techniques and other activities after fraud is suspected ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 29 Responding to Misstatements That May Be the Result of Fraud When fraud is suspected, the auditor gathers additional information to determine whether fraud actually exists ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 30 Initial Detection Method for Million-Dollar Schemes 42.3% Type of Detection Tip 46.2% 22.8% By Accident 20.0% 18.6% 19.4% Internal Audit 16.7% 23.3% Internal Controls $1,000,000 + 15.8% External Audit All Cases 9.1% 6.0% 3.2% Notified By Police 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.Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley ©2012 11 - 31 Types of Inquiry Techniques Informational Assessment Listening Evaluating responses Observing behavioral cues ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley Interrogative 11 - 32 Observing Verbal Cues ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 33 Observing Non-Verbal Cues ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 11 - 34 End of Chapter 11 ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/Elder/Beasley 5-5 ... Publishing, Auditing 14/e, Arens/ Elder/Beasley 11 - 14 Sources of Information Gathered to Assess Fraud Risks ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 11 - 15 Documenting... Gifts, entertainment, and favors Kickbacks and secret commissions Organization funds and other assets ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 11 - 20 Example Elements... Publishing, Auditing 14/e, Arens/ Elder/Beasley 11 - 27 Effect of Fictitious Inventory on Inventory Turnover ©2012 Prentice Hall Business Publishing, Auditing 14/e, Arens/ Elder/Beasley 11 - 28 Learning
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