Chapter one.ppt fraud auditing material section

chapter one auditing

1. FRAUD AUDITING Chapter one Auditing two

2. 01 02 03 04 Introduction Fraud Triangle Specific Fraud Risk Areas Assessing risk of fraud

3. 01 02 03 04 Introduction Assessing risk of fraud Fraud Triangle Specific Fraud Risk Areas

4. 01 Introduction

5. 01 The Concept of Auditing Point one : What is Fraud and its main types? Fraud is an intentional act involving the use of deception that results in a material misstatement of the financial statements

6. 01 The Concept of Auditing Asset misappropriation occurs when a perpetrator steals or misuses an organization’s assets. It is dominant fraud scheme perpetrated against small businesses and the perpetrators are usually employees Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users. Most cases involve the intentional misstatement of amounts, rather than disclosures Point one : What is Fraud and its main types?

7. 01 The Concept of Auditing Asset misappropriation occurs when a perpetrator steals or misuses an organization’s assets. It is dominant fraud scheme perpetrated against small businesses and the perpetrators are usually employees Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users. Most cases involve the intentional misstatement of amounts, rather than disclosures Point one : What is Fraud and its main types?

8. 01 The Concept of Auditing Asset misappropriation occurs when Gain access to cash and manipulate accounts to cover up cash thefts Manipulate cash disbursements through fake companies Steal inventory or other assets and manipulate the financial records to cover up the fraud Point one : What is Fraud and its main types?

9. 01 The Concept of Auditing Asset misappropriation occurs when Gain access to cash and manipulate accounts to cover up cash thefts Manipulate cash disbursements through fake companies Steal inventory or other assets and manipulate the financial records to cover up the fraud Point one : What is Fraud and its main types?

10. 01 The Concept of Auditing Asset misappropriation occurs when Gain access to cash and manipulate accounts to cover up cash thefts Manipulate cash disbursements through fake companies Steal inventory or other assets and manipulate the financial records to cover up the fraud Point one : What is Fraud and its main types?

11. 01 The Concept of Auditing Fraudulent financial reporting Companies may also intentionally understate income when earnings are high to create a reserve of earnings or “cookie jar reserves” that may be used to increase earnings in future periods Point one : What is Fraud and its main types?

12. 01 The Concept of Auditing Fraudulent financial reporting Companies may also intentionally understate income when earnings are high to create a reserve of earnings or “cookie jar reserves” that may be used to increase earnings in future periods Point one : What is Fraud and its main types?

13. 01 The Concept of Auditing Fraudulent financial reporting Companies may also intentionally understate income when earnings are high to create a reserve of earnings or “cookie jar reserves” that may be used to increase earnings in future periods Point one : What is Fraud and its main types?

14. 01 02 03 04 Introduction Assessing risk of fraud Fraud Triangle Specific Fraud Risk Areas

15. Fraud Triangle 02

16. 02 Fraud Triangle Point one : What is Fraud triangle and its basic components? Incentives or Pressures Opportunities Rationalizing The audit team should consider the incentives or pressures to commit fraud on each engagement, including the most likely areas in which fraud might take place

17. 02 Fraud Triangle Point one : What is Fraud triangle and its basic components? Incentives or Pressures Opportunities Rationalizing The audit team should consider the incentives or pressures to commit fraud on each engagement, including the most likely areas in which fraud might take place

18. 02 Fraud Triangle Point one : What is Fraud triangle and its basic components? Opportunities Incentives or Pressures Rationalizing One of the most fundamental and consistent findings in fraud research is that there must be an opportunity for fraud to be committed.

19. 02 Fraud Triangle Point one : What is Fraud triangle and its basic components? Opportunities Incentives or Pressures Rationalizing One of the most fundamental and consistent findings in fraud research is that there must be an opportunity for fraud to be committed.

20. 02 Fraud Triangle Point one : What is Fraud triangle and its basic components? Rationalizing Incentives or Pressures Opportunity Rationalization involves a person reconciling unlawful or unethical behavior, such as stealing

21. 02 Fraud Triangle Point one : What is Fraud triangle and its basic components? Rationalizing Incentives or Pressures Opportunity Rationalization involves a person reconciling unlawful or unethical behavior, such as stealing

22. 01 02 03 04 Introduction Assessing risk of fraud Fraud Triangle Specific Fraud Risk Areas

23. 03 Assessing risk of fraud

24. 03 Assessing risk of fraud Professional Skepticism : Auditing standards state that, in exercising professional skepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.” Questioning Mind : Auditing standards emphasize consideration of a client’s susceptibility to fraud, regardless of the auditor’s beliefs about the likelihood of fraud and management’s honesty and integrity Point one : gu idance to auditors in assessing the risk of fraud? Critical Evaluation of Audit Evidence Upon discovering information or other conditions that indicate a material misstatement due to fraud may have occurred, auditors should thoroughly probe the issues, acquire additional evidence as needed, and consult with other team members

25. Professional Skepticism : Auditing standards state that, in exercising professional skepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.” Questioning Mind : Auditing standards emphasize consideration of a client’s susceptibility to fraud, regardless of the auditor’s beliefs about the likelihood of fraud and management’s honesty and integrity Point one : gu idance to auditors in assessing the risk of fraud? Critical Evaluation of Audit Evidence Upon discovering information or other conditions that indicate a material misstatement due to fraud may have occurred, auditors should thoroughly probe the issues, acquire additional evidence as needed, and consult with other team members 03 Assessing risk of fraud

26. Professional Skepticism : Auditing standards state that, in exercising professional skepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.” Questioning Mind : Auditing standards emphasize consideration of a client’s susceptibility to fraud, regardless of the auditor’s beliefs about the likelihood of fraud and management’s honesty and integrity Point one : gu idance to auditors in assessing the risk of fraud? Critical Evaluation of Audit Evidence Upon discovering information or other conditions that indicate a material misstatement due to fraud may have occurred, auditors should thoroughly probe the issues, acquire additional evidence as needed, and consult with other team members 03 Assessing risk of fraud

27. Professional Skepticism : Auditing standards state that, in exercising professional skepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.” Questioning Mind : Auditing standards emphasize consideration of a client’s susceptibility to fraud, regardless of the auditor’s beliefs about the likelihood of fraud and management’s honesty and integrity Point one : gu idance to auditors in assessing the risk of fraud? Critical Evaluation of Audit Evidence Upon discovering information or other conditions that indicate a material misstatement due to fraud may have occurred, auditors should thoroughly probe the issues, acquire additional evidence as needed, and consult with other team members 03 Assessing risk of fraud

28. Communications among audit team Point two : Sources of Information to Assess Fraud Risks ? Inquiries of Management Risk Factors Risk Factors Other Information 03 Assessing risk of fraud

29. Communications among audit team Point two : Sources of Information to Assess Fraud Risks ? Inquiries of Management Risk Factors Risk Factors Other Information 03 Assessing risk of fraud

30. Communications among audit team Point two : Sources of Information to Assess Fraud Risks ? Inquiries of Management Risk Factors Risk Factors Other Information 03 Assessing risk of fraud

31. Communications among audit team Point two : Sources of Information to Assess Fraud Risks ? Inquiries of Management Risk Factors Risk Factors Other Information 03 Assessing risk of fraud

32. Communications among audit team Point two : Sources of Information to Assess Fraud Risks ? Inquiries of Management Risk Factors Other Information 03 Assessing risk of fraud Analytical procedure

33. Communications among audit team Point two : Sources of Information to Assess Fraud Risks ? Inquiries of Management Risk Factors Risk Factors Other Information 03 Assessing risk of fraud

34. Communications among audit team Point two : Sources of Information to Assess Fraud Risks ? Inquiries of Management Risk Factors Analytical procedure Other Information 03 Assessing risk of fraud

35. The discussion among engagement team personnel in planning the audit Point three : Documenting Fraud Assessment ? Procedures performed to obtain information necessary Specific risks of material fraud that were identified Reasons supporting a conclusion that there is not a significant risk of material improper revenue recognition 03 Assessing risk of fraud

36. The discussion among engagement team personnel in planning the audit Point three : Documenting Fraud Assessment ? Procedures performed to obtain information necessary Specific risks of material fraud that were identified Reasons supporting a conclusion that there is not a significant risk of material improper revenue recognition 03 Assessing risk of fraud

37. Point three : Documenting Fraud Assessment ? Results of the procedures performed to address the risk of management override of controls. 03 Assessing risk of fraud Other conditions and analytical relationships indicating that additional auditing procedures or other responses were required, and the actions taken by the auditor. The nature of communications about fraud made to management, the audit committee, or others.

38. Point three : Documenting Fraud Assessment ? Results of the procedures performed to address the risk of management override of controls. 03 Assessing risk of fraud Other conditions and analytical relationships indicating that additional auditing procedures or other responses were required, and the actions taken by the auditor. The nature of communications about fraud made to management, the audit committee, or others.

39. Point four : Corporate Governance and Fraud Risks ? 03 Assessing risk of fraud Corporate governance is a process by which the owners (stockholders) and creditors of an organization exert control and require accountability for the resources entrusted to the organization. The owners elect a board of directors to provide oversight of the organization’s activities and accountability to stakeholders. Management is responsible for implementing corporate governance and control procedures to minimize the risk of fraud, which can be reduced through a combination of prevention, deterrence, and detection measures. Because collusion and false documentation make detection of fraud a challenge

40. Point four : Corporate Governance and Fraud Risks ? 03 Assessing risk of fraud Corporate governance is a process by which the owners (stockholders) and creditors of an organization exert control and require accountability for the resources entrusted to the organization. The owners elect a board of directors to provide oversight of the organization’s activities and accountability to stakeholders. Management is responsible for implementing corporate governance and control procedures to minimize the risk of fraud, which can be reduced through a combination of prevention, deterrence, and detection measures. Because collusion and false documentation make detection of fraud a challenge

41. Point four : Corporate Governance and Fraud Risks ? 03 Assessing risk of fraud Corporate governance is a process by which the owners (stockholders) and creditors of an organization exert control and require accountability for the resources entrusted to the organization. The owners elect a board of directors to provide oversight of the organization’s activities and accountability to stakeholders. Management is responsible for implementing corporate governance and control procedures to minimize the risk of fraud, which can be reduced through a combination of prevention, deterrence, and detection measures. Because collusion and false documentation make detection of fraud a challenge

42. Point four : Guidance developed by the AICPA identifies three elements to prevent, and detect fraud? 03 Assessing risk of fraud Culture of Honesty and High Ethics

43. Point four : Guidance developed by the AICPA identifies three elements to prevent, and detect fraud? 03 Assessing risk of fraud Culture of Honesty and High Ethics Setting the Tone at the Top Creating a Positive Workplace Environment Hiring and Promoting Appropriate Employees Training, conformation Discipline

44. Point four : Guidance developed by the AICPA identifies three elements to prevent, and detect fraud? 03 Assessing risk of fraud Culture of Honesty and High Ethics Setting the Tone at the Top Creating a Positive Workplace Environment Hiring and Promoting Appropriate Employees Training, conformation Discipline

45. Point four : Guidance developed by the AICPA identifies three elements to prevent, and detect fraud? 03 Assessing risk of fraud Management’s Responsibility to Evaluate Risks of Fraud Identifying and Measuring Fraud Risks Mitigating Fraud Risks Monitoring Fraud Prevention Programs and Controls

46. Point four : Guidance developed by the AICPA identifies three elements to prevent, and detect fraud? 03 Assessing risk of fraud Management’s Responsibility to Evaluate Risks of Fraud Identifying and Measuring Fraud Risks Mitigating Fraud Risks Monitoring Fraud Prevention Programs and Controls

47. Point four : Guidance developed by the AICPA identifies three elements to prevent, and detect fraud? 03 Assessing risk of fraud Audit Committee Oversight Direct reporting of key findings by internal audit to the audit committee Periodic reports by ethics officers about whistleblowing Other reports about lack of ethical behavior or suspected fraud

48. Point four : Guidance developed by the AICPA identifies three elements to prevent, and detect fraud? 03 Assessing risk of fraud Audit Committee Oversight Direct reporting of key findings by internal audit to the audit committee Periodic reports by ethics officers about whistleblowing Other reports about lack of ethical behavior or suspected fraud

49. 01 02 03 04 Introduction Assessing risk of fraud Fraud Triangle Specific Fraud Risk Areas

50. Specific Fraud Risk Areas 04

51. Point one : Specific Fraud Risk Areas? 04 Specific Fraud Risk Areas Audit Committee Oversight Direct reporting of key findings by internal audit to the audit committee Periodic reports by ethics officers about whistleblowing Other reports about lack of ethical behavior or suspected fraud

52. Point one : Specific Fraud Risk Areas? 04 Specific Fraud Risk Areas Audit Committee Oversight Direct reporting of key findings by internal audit to the audit committee Periodic reports by ethics officers about whistleblowing Other reports about lack of ethical behavior or suspected fraud

53. Point one : Specific Fraud Risk Areas? 04 Specific Fraud Risk Areas Audit Committee Oversight Direct reporting of key findings by internal audit to the audit committee Periodic reports by ethics officers about whistleblowing Other reports about lack of ethical behavior or suspected fraud

54. Point one : Specific Fraud Risk Areas? 04 Specific Fraud Risk Areas Audit Committee Oversight Direct reporting of key findings by internal audit to the audit committee Periodic reports by ethics officers about whistleblowing Other reports about lack of ethical behavior or suspected fraud

55. Point one : Specific Fraud Risk Areas? 04 Specific Fraud Risk Areas Audit Committee Oversight Direct reporting of key findings by internal audit to the audit committee Periodic reports by ethics officers about whistleblowing Other reports about lack of ethical behavior or suspected fraud

56. Point one : Specific Fraud Risk Areas? 04 Specific Fraud Risk Areas Audit Committee Oversight Direct reporting of key findings by internal audit to the audit committee Periodic reports by ethics officers about whistleblowing Other reports about lack of ethical behavior or suspected fraud

57. Think! Determine which Factor of fraud triangle A cashier in a retail store with weak cash register controls might see an opportunity to steal money by voiding fake sales transactions An employee who inflates expense reports might rationalize it by telling themselves that they are simply "evening the score" for all the extra hours they work for free An accountant facing foreclosure on their house might feel pressured to cook the books to make the company look more profitable and secure a loan. Opportunity Rationalization Incentive (Pressure) 00 Main questions

58. Think! Determine which Factor of fraud triangle There was intense pressure to keep the corporation’s stock from declining further. This pressure came from investors, analysts, and the CEO, whose financial well-being was significantly dependent on the corporation’s stock price. Top management of the company closely guards internal financial information, to the extent that even some employees on a “need-to-know basis” are denied full access. Incentive/Pressure Opportunity 00 Main questions

59. Think! Determine which Factor of fraud triangle Managing specific financial ratios is very important to the company, and both management and analysts are keenly observant of variability in key ratios. Key ratios for the company changed very little even though the ratios for the overall industry were quite volatile during the time period. Opportunity 00 Main questions

60. Think! Discuss Define fraud and its main types What are the three conditions of fraud often referred to as “the fraud triangle?” What sources are used by the auditor to gather information to assess fraud risks? 00 Main questions

61. Think! True or false The three elements of the fraud triangle include incentive, opportunity, and rationalization. Professional skepticism involves the validation of information through probing questions, critical assessment of evidence, and attention to inconsistencies. Corporate governance is the process by which the owners and creditors of an organization exert control over and require accountability for the resources entrusted to the organization. 00 Main questions True True True Companies with effective corporate governance are riskier to audit. False

62. Think! MCQ 00 Main questions What is the primary difference between fraud and errors in financial statement reporting? A) The materiality of the misstatement. B) The intent to deceive. C) The level of management involved. D) The type of transaction effected. B Because of the risk of material misstatements due to fraud (fraud risk), an audit of financial statements in accordance with generally accepted auditing standards should be performed with an attitude of A) professional skepticism B) objective judgment. C) independent integrity. D) impartial conservatism. A

63. Discussion on our main points and conclusion Any questions

64. Thank you