25. Fraud is an intentional act involving the use of deception that results in a material misstatement of the financial statements. The two types of misstatements that are relevant to auditors are: The misstatement arising from misappropriation- this occurs when someone steals or misuses an organizations assets. Perpetrators are usually employees and occur when they gain access to cash or cash disbursement accounts and can manipulate them. Misstatement arising from fraudulent financial reporting- the perpetrators generally doesn’t seek personal gain, but want to make the company look better or avoid bankruptcy. They accomplish this by falsely altering account records, omission of events or transactions, and intentional misuse of accounting principles.
26. Three common ways that fraudulent financial reporting can take place are: Manipulation, falsification, and alteration of accounting records or supporting documents. Misrepresentation or omission of events, transactions, or other significant information. Intentional misapplication of accounting principles.
30. If any one of the three fraud elements is missing, it is less likely for the fraud to occur. When the auditor starts to consider that fraud could be occurring they need to start the investigation with the consideration of the opportunity, incentive, and rationalization.
31. It is not likely for fraud to occur if not all three of the elements of fraud are there. Without the opportunity and poor internal controls, fraud would be more difficult if not impossible to commit. Also, rationalization is crucial to committing fraud. If someone recognized the act of being unlawful and unethical and accepts the fact that they are committing a crime, there is no way they aren’t ready to commit the crime.
32. Some red flags of fraud opportunity that auditors should consider are: Significant related-party transactions
A company’s industry position
Management’s inconsistent judgments regarding assets...
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