Fraud & Error.doc
- 1. CHAPTER 4 FRAUD & ERROR Fraud – intentional act by one or > individual among mgt, employee or 3rd parties, which results in a misrepresentation of financial statement. Involve Manipulation, falsification or alteration or records & documents Misappropriation of assets Suppression/omission of effects of transactions from records/documents Recording of record without substance Misapplication of accounting policies Error – unintentional act or mistakes in financial statements e.g – mathematical/clerical mistakes underlying records & accounting data. Oversight/misinterpretation of facts misapplication of accounting policies Withdrawal from engagement When the entity does no take remedial action regarding fraud that considered material by the auditor Procedures where there is an indication that fraud & error may exists Responsibilities Reporting of fraud & error Auditors Do not held responsibilities for the prevention but deterrent Conditions which high risk of fraud & error Questions with respect to the integrity/competence of management Unusual pressures with in/on an entity Unusual transactions Problems in obtaining sufficient appropriate audit evidence Management Implementation & continuing operation of adequate accounts & internal control system Installing an effective accounting system. Establishing an effective internal control system. Establishing an internal audit function. Appointing audit committee Establishing and implementing code of conduct among the employee and management Do not eliminate but reduce Depends on auditor’s judgment The types of fraud & error indicated The likelihood of their occurrence The likelihood that a particular type of fraud/error could have a material effect on the financial statements To management Factual findings insignificant of the level of immaterial/existence of the error Auditor would consider all the circumstances To users of the Auditor’s report on the financial statements Material effect & no correction has been made (qualified/adverse opinion) Obtain sufficient audit evidence to evaluate material problems (qualified/disclaimer) Unable to determine due to limitation imposed. The auditor should consider the effect on the audit report. To regulatory & enforcement auditors Legal advice when duty of confidentiality is overridden by statute, law/courts. Internal auditors to detect fraud as they have a continual presence in the organization, hence have a better understanding of the organization and its control systems. can assist management in deterrence of fraud by examining and evaluating the adequacy and the effectiveness of internal controls establishing effective fraud prevention measures by knowing the organization’s strengths and weaknesses and providing consulting expertise.