Business, 03.03.2020 21:30 mimithurmond03

Management fraud (e. g., fraudulent financial reporting) is a relatively rare event. However, when it does occur, the frauds (e. g., Enron and WorldCom) can have a significant effect on shareholders, employees, and other parties. AU 240, Consideration of Fraud in a Financial Statement Audit, provides the relevant guidance for auditors.

Required:
a. What is the auditor's responsibility for detecting fraud?
b. Describe the three conditions that are generally present when fraud occurs?
c. What are the objectives of the " brainstorming" meeting that is held among the engagement team members?
d. What is the required documentation for identified risk factors?

Answers: 3

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Answers

Answer from: johnbobjones

A. ANSWER:

The Auditors major responsibility for detecting fraud is to flag it and report it.

EXPLANATION:

He or she may:

Report it to the audit committee or

to the highest level of management (if they are not involved in the fraud), or

to the shareholders if the fraud was and or is being committed by those in senior management

It is also the Auditors responsibility to:

Detect any error leading to a material misstatement. A material misstatement is information in the financial statements that is sufficiently incorrect that it may impact the economic decisions of someone relying on those statements

If the error is immaterial, it should be reported to those charged with governance.

Here there is no responsibility to detect them.

At the Planning Stage consider in advance, the risk of material misstatement due to fraud and error

B. ANSWER

The three conditions generally present when fraud occurs are:

Opportunity

Incentive

Rationalization

EXPLANATION

1. Opportunity:

Opportunity refers to circumstances that allow fraud to occur. In the fraud triangle, it is the only component that a company exercises complete control over. Examples of conditions that provide opportunities for committing fraud include but are not limited to: Weak internal controls, lack of integrity at management level, inadequate accounting policies.

2. Incentive:

This is alternatively called pressure, or motive. It refers to an employee’s mindset towards committing fraud. Examples of things that provide incentives for committing fraud include:

Bonuses based on a financial metric

Common financial metrics used to assess the performance of an employee are revenues and net income. Bonuses that are based on a financial metric creates pressure for employees to meet targets which, in turn, may cause them to commit fraud to achieve the objective.

Investor and analyst expectations

The need to meet or exceed investor and analyst expectations can create pressure to commit fraud.

Personal needs

Personal needs may include wanting to earn more money, the need to pay personal bills, a gambling addiction, etc.

3. Rationalization

Rationalization refers to an individual’s justification for committing fraud. Examples of common rationalizations that fraud committers use include:

“They treated me wrong”

An individual may be spiteful towards their manager or employer and believe that committing fraud is a way of getting payback.

“Upper management is doing it as well”

Lack of integrity at the top may cause an individual to follow in the footsteps of those higher in the corporate hierarchy.

“There is no other solution”

An individual may believe that they might lose everything (for example, losing a job) unless he or she commits fraud.

C. ANSWER

The objectives of the "Fraud Brainstorming" meeting that is held among the engagement team members are to:

Share insights about the entity and its environment and the entity's business risksProvide an opportunity for the team members to discuss how and where the entity might be susceptible to fraudEmphasize the importance of maintaining professional skepticism throughout the audit regarding the potential for material misstatement due to fraud

EXPLANATION

Auditors are required to hold discussions ( "brainstorming sessions) with the audit team about the entity's financial statements' susceptibility to material misstatements In planning the audit, the engagement partner or manager should communicate with members of the audit team regarding the potential for misstatement due to fraud . The brainstorming session can be held separately, or concurrently with the discussion required as part of understanding the entity and its environment

D. ANSWER

The required documents for identified risk factors are:

A record of the discussion among the engagement team where required and the significant decisions reached;A record holding the key elements of the understanding obtained regarding each of the aspects of the entity and its environment specified and of each of the internal control components the sources of information from which the understanding was obtained; and the risk assessment procedures performed;the identified and assessed risks of material misstatement at the financial statement level and at the assertion level ; andthe risks identified, and related controls about which the auditor has obtained an understanding

Answer from: Quest

what are the options

explanation:

Answer from: Quest

match each type of restriction with one of its effects.

a. land-use laws

b. labor laws

c. banking regulations

a. controlled development of towns and cities

b. protection of young workers

c. greater financial stability

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