Bus 426 - Chapter 11

5 Pages

Business Administration
Course Code
BUS 426
Michael Favere- Marchesi

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Chapter 11 -Fraud Auditing  Fraud: An intentional misstatement of the financial statements  Types of Fraud  Fraudulent Financial Reporting: Intentional misstatements or omission of amounts or disclosure in financial statements to deceive users o Earnings Management: Deliberate actions taken by management to meet earnings objectives o Income Smoothing: Form of earnings management in which revenues and expenses are shifted between periods to reduce fluctuations in earnings  Misappropriation of Assets: A fraud involving the theft of an entity’s assets o Management Corruption: To misuse something that belongs to somebody else and is held in trust, involving top management o Procurement Fraud: The manipulation of the contracting process.  Bid rigging, where the bidders for a contract collude to increase the price of the contract  Bid fixing, where a bidding party is provided with insider information, giving an unfair advantage  Bribery and Kickbacks, where the contract is awarded on the basis of a payment to a company insider involved in the contract-awarding decision o Corporate Identity Theft: Another organization represents itself as the affected company   Conditions for Fraud   Fraud Triangle: Represents the three conditions for fraud:  Incentive/pressure  Opportunities  Attitudes/rationalization Chapter 11 -Fraud Auditing  Fraud Risk Factors: Entity factors that increase the risk of fraud Corporate Governance to Reduce Fraud Risks  Creating a Culture of Honesty and High Ethics o Setting the tone at the top o Creating a positive workplace environment o Hiring and promoting appropriate employees o Training o Confirmation: Have employees confirm their responsibilities with the code of conduct o Discipline o Other Declarations  Confidentiality Policy  Independence Policy  Electronic Communication Policy  Computer Software Policy  Responsibility to Manage Risks of Fraud o Board of directors and senior management should clarify their expectations regarding fraud risk in a written policy o Fraud risk exposures should be assessed o Controls and actions to prevent or mitigate fraud risk should be present o Communication, reporting and monitoring should be used  Clarifying Board Expectations  Identifying and Measuring Fraud Risks  Mitigating Fraud Risks  Implementing Detective Controls  Communicating, Reporting and Monitoring Fraud Risk Management Programs  The Audit Committee oversees its internal control and financial reporting processes, so it acts as a deterrent for fraud Auditors Role in Assessing the Risk of Fraud  Must maintain a level of professional skepticism, where the attitude of the auditor neither assumes management is dishonest nor assumes unquestioned honesty o Allow for potential fraud even though management displayed honesty and integrity in the past o Unless the audit reveals that some documents are unauthentic, auditor considers the documents genuine o Where evidence and inquiries to governance personnel is inconsistent, the auditor must gather further evidence  Have a Questioning Mind  Critical Evaluation of Audit Evidence Chapter 11 -Fraud Auditing  Fraud Risk Assessment, have a plan that considers fraud risks throughout the whole audit  Consider the Sources o
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