ACCTG 5510 1st Edition Lecture 7 Outline of Last Lecture I Audit Planning II Client Acceptance III Materiality IV Audit Risk Model V Evidence Testing VI Design an Audit program Outline of Current Lecture I Types of Fraud II Conditions for Fraud III Risk Assessment Current Lecture I II Types of Fraud a Fraud can be defined the intentional misstatement of financial statements There are two main categories of fraud i Fraudulent financial reporting the most likely individual to commit this type of fraud is upper management as they have the ability to easily make changes to accounting estimates which are subjective in nature ii Misappropriation of assets involves the theft of an entity s assets and is generally not material but in rare cases can be Conditions for Fraud a There are three conditions which are usually met when fraud is present Combined they are known as the fraud triangle b The three conditions include i Incentive Pressure incentive and or pressure is generated by management or other employees ii Opportunities there is a situation presenting an individual with the option of committing fraud iii Attitudes Rationalization an individual s ethical values are weak or distorted compared to others or the pressure incentive These notes represent a detailed interpretation of the professor s lecture GradeBuddy is best used as a supplement to your own notes not as a substitute presented causes the individual to rationalize making it seem okay to commit fraud III Risk Assessment a An auditor must maintain an attitude of professional skepticism during an audit as stated in the Auditing Standards Such an attitude does not assume that fraud will be present in an audit but also does not assume that management or employees are completely honest b Steps in Auditor Fraud Assessment Evaluation and Conclusion i The engagement team on the audit will meet and discussion areas of the audit where there is the greatest risk of fraud There usually is some discussion of maintaining the proper frame of mind during the audit ii The auditor must assess the amount of audit risk associated with the client This will include management inquiry internal audit inquiry examining the result of analytic procedures and other applicable risk factors depending on the client iii The auditor will then be more specific concerning what accounts are most vulnerable including significance likelihood and how pervasive fraud in that specific area might be iv The IT system used by the client must be correlated to the identified risk areas e g internal controls need to be in place v As a result of the identifying the potential risk areas the planning phase of the audit must include measures to mitigate the risk Audit procedures will be tailored around high risk areas with more experience members of the engagement team auditing the higher risk areas 1 Examples of audit areas which inherently contain a high fraud risk included a Revenue recognition policies b Management estimate e g allowance accounts and capitalization policies c Related party transactions d Transactions that are highly unusual and sometimes near the period end vi All audit evidence must be thoroughly evaluated for fraud risk with a reassessment of fraud risk at the end of the audit procedures All discussions assessments findings and conclusions related to fraud must be documented