AUDITORS RESPONSIBILITY FOR

DETECTING FRAUD
1. Description and characteristics of fraud
2. Professional skepticism
3. Engagement personnel discussion
4. Obtaining audit evidence and information
5. Identifying risks
6. Assessing the identified risks
7. Responding to the assessment
8. Evaluating audit evidence and information
9. Communicating possible fraud
10. Documenting consideration of fraud

FRAUDULENT FINANCIAL REPORTING

Managements characteristics and influence over the control environment.
These factors relate to the tone-at-the-top regarding internal control,
management style, situational pressures, and the financial reporting process.
Industry conditions.
Thisincludes theeconomic andregulatory environmentinwhich theentity
operates
Operating characteristics and financial stability.
This pertains to the nature of the entity and the complexity of its transactions

IN THE CASE OF FINANCIAL FRAUD , EXTERNAL

AUDITORS SHOULD LOOK FOR THE FOLLOWING
KINDS OF COMMON SCHEMES:
Improper revenue recognition
Improper treatment of sales
Improper asset valuation
Improper deferral of costs and expenses
Improper recording of liabilities
Inadequate disclosures

MISAPPROPRIATION OF ASSETS
Susceptibility of assets to misappropriation.
The susceptibility of an asset pertains to its nature and the degree
to which it is subject to theft.
Controls.
This class of risk factors involves the inadequacy or lack of
controls de- signed to prevent or detect misappropriation of assets

EXAMPLES OF COMMON SCHEMES RELATED TO

EMPLOYEE THEFT (ASSET MISAPPROPRIATION)
INCLUDE THE FOLLOWING:
Personal purchases
Ghost employees
Fictitious expenses
Altered payee
Pass-through vendors
Theft of cash (or inventory)
Lapping

AUDITORS RESPONSE TO RISK

ASSESSMENT
Engagement staffing and extent of supervision.
Professional skepticism.
Nature, timing, and extent of procedures performed.

WHEN THE AUDITOR HAS DETERMINED THAT FRAUD

EXISTS BUT HAS HAD NO MATERIAL EFFECT ON THE
FINANCIAL STATEMENTS, THE AUDITOR SHOULD
Refer the matter to an appropriate level of management at least one level
above those involved.
Be satisfied that implications for other aspects of the audit have been
adequately considered.

WHEN THE FRAUD HAS HAD A MATERIAL EFFECT ON THE

FINANCIAL STATEMENTS OR THE AUDITOR IS UNABLE TO
EVALUATE ITS DEGREE OF MATERIALITY, THE AUDITOR SHOULD

Consider the implications for other aspects of the audit.

Discuss the matter with senior management and with a board of directors
audit committee.
Attempt to determine whether the fraud is material.
Suggest that the client consult with legal counsel, if appropriate.

PAYMENTS TO FICTITIOUS VENDORS

Sequential Invoice Numbers

- sort

Vendors with P.O. Boxes - filter

Vendors with Employee Addresses - join
Multiple Companies with the Same Address - duplicates
Invoice Amounts Slightly below the Review Threshold - create

PAYROLL FRAUD
Test for Excessive Hours Worked - Use ACLs Expression Builder
Test for Duplicate Payments - Use ACLs Duplicates
Same employee number, same name, same address, etc. (duplicate payments)
Same name with different mailing addresses
Same name with different checking accounts
Same name with different Social Security numbers
Same mailing address with different employee names
Test for Nonexistent Employees - Use ACLs Join

LAPPING ACCOUNTS RECEIVABLE

The Balance Forward Method
The Open Invoice Method