Shih Hong Lin
A. What distinguishes management fraud from defalcation?
Defalcation is misappropriation of assets such as employee fraud, embezzlement and larceny. Management fraud has deliberate intention that uses fraudulent financial statement to covey wrong messages to its investor, creditor and the public. The major difference is the intention that distinguishes management fraud from defalcation. In defalcation, people who commit such crime is out of greedy. However, in management fraud, management tries to change people’s opinion toward the company and cover a bad operation condition in the company.
B. What are an auditor’s responsibilities under auditing standards to detect management fraud?
An auditor should conduct an audit in accordance with GAAS and design procedures to provide reasonable assurance that material frauds that might misstate the financial statement are detected.
C What are some characteristics of management fraud that an audit team should consider to fulfill the responsibilities under auditing standards?
Auditors are concerned about the management fraud that affects the financial statement. In other words, auditors are responsible to detect the frauds that cause materially misstated financial statement and auditors are not responsible to detect all frauds.
What factors might an audit team notice that should heighten the concern about existence of management fraud? Auditors should notice events or conditions that indicate an incentive or pressure to perpetrate fraud, provide an opportunity to commit fraud, or indicate attitudes or rationalizations to justify a fraudulent action. 1. Management’s characteristics and influence
Ex. Management’s attitude is aggressive toward financial statements and has motivation to engage in fraudulent report. 2. Industry conditions. Ex. The company is in the rapidly changed industry. 3. Operating characteristics and financial stability. Ex. Weak internal control in the...
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