Lecture 8: Fraud (Recap) – April 2025 Semester

Vocabulary flashcards covering key standards, concepts, and responsibilities related to fraud in auditing, as discussed in Lecture 8.

Fraud (in auditing)

An intentional act designed to misstate the financial statements.

Error

An unintentional misstatement in financial statements, distinguished from fraud.

Fraudulent Financial Reporting

Intentional manipulation, falsification, or misrepresentation of accounting records or policies to misstate financial results.

Misappropriation of Assets

Theft or embezzlement of an entity’s assets, including cash, inventory, or intellectual property.

Fraud Risk Triangle

Model stating that fraud arises when Pressure, Opportunity, and Rationalization coexist.

Pressure (Fraud Condition)

Incentive or motivation—such as financial targets or personal debt—that drives individuals to commit fraud.

Opportunity (Fraud Condition)

A weakness in internal control that allows fraudsters to execute and conceal a fraud.

Rationalization (Fraud Condition)

The attitude or mindset that justifies fraudulent behavior as acceptable or unavoidable.

Reasonable Assurance

The high—but not absolute—level of confidence the auditor seeks that financial statements are free of material misstatement.

Brainstorming Session

Required audit team discussion of how and where the financial statements could be susceptible to fraud.

Analytical Procedures

Evaluation of financial information through analysis of plausible relationships among both financial and non-financial data.

Unexpected Period-End Adjustments

Late or unusual journal entries examined by auditors for potential fraud indicators.

Professional Scepticism

A questioning mind and critical assessment of audit evidence, vital when fraud risk is present.

Elements of Unpredictability

Variation in the nature, timing, and extent of audit procedures to make concealment of fraud more difficult.

Sec 266(9) Companies Act 2016

Requires auditors of public companies to report suspected serious fraud or dishonesty to the Registrar of Companies.

Communication with Those Charged with Governance

Auditor obligation to inform the board/audit committee of fraud involving senior management or material misstatements.

Auditor Documentation (Fraud)

Record of fraud discussions, risk assessments, procedures performed, results, and communications regarding fraud.

IESBA Code of Ethics

Professional code that outlines when auditors may disclose confidential information, including fraud reporting.

What is a key area auditors assess to identify "Opportunity" for fraud within an entity?

The effectiveness of internal controls, as weaknesses provide the means for fraud to be committed and concealed.

What types of information do auditors look for to identify "Pressure" that might lead to fraud?

Indicators such as aggressive financial targets, personal financial difficulties of key personnel, or industry economic conditions creating incentives for misstatement.These indicators can suggest motives that drive individuals within the organization to commit fraud.