A2 M9 Fraud Risk

Fraud vs Error

Fraud is an intentional act causing financial statement misstatements, whereas errors are unintentional misstatements or omissions.

Fraudulent Financial Reporting

Intentional misstatements, omissions, or manipulation of accounting records and supporting documents to deceive financial statement users.

Misappropriation of Assets

The theft of an entity's assets causing financial statements not to be presented in conformity with GAAP.

Fraud Triangle Factors

1. Incentive/Pressure

2. Opportunity

3. Rationalization/Attitude

Auditor's Fraud Responsibility

The auditor must design the audit to provide reasonable assurance that financial statements are free of material misstatement, whether caused by error or fraud.

Professional Skepticism in Fraud Assessment

Requires maintaining a mindset that recognizes the possibility of material misstatement due to fraud, regardless of past experience or management honesty.

Required Engagement Team Brainstorming

Mandatory discussion among audit team members during planning regarding the susceptibility of financial statements to material fraud.

Presumption of Fraud Risk in Revenue Recognition

An auditor must ordinarily presume that there is a risk of material misstatement due to fraud related to revenue recognition.

Mandatory Response to Management Override

Audit procedures required to address the risk of management overriding controls, including testing journal entries, reviewing accounting estimates, and evaluating unusual transactions.

Reporting Fraud to Management and Governance

Any fraud involving senior management or resulting in material misstatement must be reported directly to those charged with governance.

External Disclosure of Fraud

Ordinarily confidential, but disclosure outside the entity is required to comply with legal/regulatory demands, successor auditor inquiries, subpoenas, or funding agencies.

Documentation of Fraud Assessment

Detailed audit documentation required covering team brainstorming, risk assessment procedures, identified fraud risks, and responses to management override

Fraud risk reasonable assurance

The auditor provides reasonable, but not absolute, assurance that financial statements are free of material misstatement due to fraud, acknowledging that fraud may involve collusion or concealment.

Management Responsibility for Fraud

Management is responsible for designing, implementing, and maintaining internal controls to prevent and detect fraud.

Required Audit Procedures for Fraud

Auditors must perform specific procedures including making inquiries of management and others, conducting analytical procedures, evaluating fraud risk factors, and holding team discussions.

Obtaining Fraud Risk Information

Involves making inquiries of company personnel regarding knowledge or suspicion of fraud, evaluating unexpected analytical relationships, and identifying present fraud risk factors.

Identifying Fraud Risks

Requires evaluating identified risks by considering four attributes: the type of risk, its significance, the likelihood of occurrence, and its pervasiveness.

Presumption of Risk in Fraud Assessment

The auditor must ordinarily presume there is a risk of material misstatement due to fraud in revenue recognition and evaluate the risk of management override of controls.

Assessing Fraud Risk

The auditor assesses identified fraud risks at both the financial statement level and the assertion level to determine the required audit response.

Responding to Assessed Fraud Risk

Requires an overall response affecting engagement staffing and supervision, specific procedures addressing assertion-level risks, and mandatory procedures for management override.

Communicating Fraud to Management and Those Charged with Governance

Inquiries and findings regarding fraud must be communicated to appropriate management levels, with any senior management fraud or material misstatements reported directly to those charged with governance.

Disclosing Fraud to Parties Outside the Entity

Auditor communications outside the client entity are generally restricted, but exceptions exist for legal/regulatory compliance, successor auditor inquiries, subpoenas, and government funding requirements