Fraud Risk

Basics

• Fraud = intent; error = unintentional. Reasonable assurance, not detection of all fraud.
• Types: fraudulent financial reporting (management) vs misappropriation (lapping, kiting, ghost employees).
• Fraud triangle: incentive/pressure, opportunity, attitude/rationalization.

Required every audit

1. Team discussion (brainstorming) with skepticism.
2. Inquiries of management, those charged with governance, internal audit, others.
3. Analytical procedures, including on revenue.
4. Presumed risks: revenue (rebuttable) and management override (never rebuttable).
5. Override responses: journal entry testing, retrospective review of estimates, rationale for unusual transactions.

Responses

Experienced staff · more supervision · unpredictability · year-end timing · more persuasive evidence.

Communication

• Any fraud → management one level above.
• Senior management fraud or material fraud → those charged with governance.
• Outside parties only for laws, successor auditor, subpoena, government funding agency.

Laws and regulations

Direct-effect laws → obtain evidence of compliance. Other laws → inquiry and inspection of regulator correspondence.

Exam traps

• The auditor doesn't decide whether fraud legally occurred — that's for the courts.
• The team discussion is required even when the team believes management is honest.
• Journal entry testing focuses on entries made at year end or after closing, by unusual users, or to unusual accounts.