Fraud and illegal acts 4 9 2015

Topics: Auditing, Audit, Fraud Pages: 21 (893 words) Published: June 22, 2015
FRAUD VS. ILLEGAL ACTS

WHAT IS THE AUDITING DEFINITION OF FRAUD
AND ILLEGAL ACTS?

DEFINITIONS

Fraud:
 Fraud is an intentional act that

results in a misstatement in
financial statements that are
the subject of an audit (AU-C
240.11)

ILLEGAL ACTS:
 Illegal acts, in the context of

auditing, is referred to
Noncompliance.
 Noncompliance is “acts of omission
or commission by the entity, either
intentional or unintentional, which
are contrary to the prevailing laws
or regulations,” AU-C 250.11

WHO IS PRIMARILY RESPONSIBLE FOR DETECTION AND
PREVENTION?

Fraud

NONCOMPLIANCE




Governing board of the entity and management is primarily responsible for fraud prevention and detection (AU-C 240.04)



Management is primarily responsible, with the governing board entailed with oversight, of complying with current laws and regulations.
This includes laws and regulations that pertain to the reported amounts and disclosures in an entity’s financial statements (AU-C 250.03)

WHAT ARE THE DIFFERENCES AND
SIMILARITIES BETWEEN FRAUD AND ILLEGAL
ACTS?

DIFFERENCES:

Fraud:
 When an auditor conducts an

audit according to GAAS, the
auditor is responsible for
providing reasonable assurance
that the financial statements are
free from material
misstatements, whether due to
error or fraud. (AU-C 240.05)

ILLEGAL ACTS:
 When an auditor conducts an

audit according to GAAS, “the
auditor is not responsible for
preventing noncompliance and
cannot be expected to detect
noncompliance with all laws
and regulations” (AU-C 250.04)

SIMILARITIES:

Fraud:

ILLEGAL ACTS:

 Auditor needs to exercise

 Auditor needs to exercise

professional skepticism
 High Risk of not detecting fraud
due to inherent limitations:

professional skepticism
 High Risk of not detecting
noncompliance due to inherent
limitations:

 Management fraud is much harder

for an auditor to detect that fraud
committed by employees
 Management override of controls
or collusion

 Many laws and regulations don’t

affect the financial reporting
 Management override of controls,
collusion, forgery,

IS AN ILLEGAL ACT ALWAYS FRAUD?
IS FRAUD ALWAYS AN ILLEGAL ACT?

OBJECTIVES
Fraud (AU-C 240.10)

NONCOMPLIANCE (AU-C
250.10)

 Auditor must assess and identify

 Auditor should understand laws and

the risks of material misstatement
of the financial statements due to
fraud
 Auditor should obtain sufficient
audit evidence based on the level
of assessed audit risk
 If an auditor discovers or suspects
fraud, the auditor should respond
appropriately.

regulations that generally have a
direct effect on the financial
statement of an entity and obtain
appropriate audit evidence
 Auditor should perform procedures
that could identify noncompliance
with laws and regulations that could
have a material effect on financial
statements
 If an auditor discovers or suspects
noncompliance with laws and
regulations, the auditor should

WHY DO COMPANIES COMMIT FRAUD?

FRAUD TRIANGLE

FACTORS CONTRIBUTING TO FRAUD:
 Ineffective or absent internal controls and policies
 Ineffective management
 Management or control overrides  
 Collusion among employees over whom there is little to no supervision  The presence of unethical behavior poses significant risk to any

organization

(courtesy of http://internalaudit.wayne.edu/fraud.php#Definition)

DANGER SIGNS OF FRAUD AN AUDITOR SHOULD LOOK FOR:
 High employee turnover
 Low employee morale
 No supporting documentation for adjusting entries
 Incomplete or untimely bank reconciliations
 Write-offs of inventory shortages with no attempt to determine the cause  Unrealistic performance expectations
 Rumors of conflicts of interest
 Using duplicate invoices to pay vendors
 Dormant accounts
(courtesy of http://internalaudit.wayne.edu/fraud.php#Definition)

TWO TYPES OF...
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