Chapter 10: Assessing and
Responding to Fraud Risks
questions and answers (graded
A+)
Types of Fraud Risk - answer1.) Fraudulent financial reporting
2.) Misappropriation of assets
Fraudulent financial reporting - answerAn intentional misstatement
or omission of amounts or disclosures with the intent to deceive
users
-most cases involve an attempt to overstate income, but can also
understate income (increase liabilities)
-earnings management involves fraud to meet earnings goals
-income smoothing is a form of earning management that shifts
income from year to year to reduce fluctuations
Misappropriation of assets - answerFraud that involves theft of an
entity's assets. Normally perpetrated by lower level employees, but
can involve upper management
Conditions of Fraud - answerThree conditions for fraud are referred
to as the fraud triangle:
1.) Incentives/Pressures- management or other employees have
incentive/pressures to commit fraud
, 2.) Opportunities- circumstances provide opportunities for
management/employees to commit fraud
3.) Attitude/Rationalization- attitude, character, or set of ethical
values exists that allows management/employees to commit a
dishonest act, or they are in an environment that imposes sufficient
pressure that causes them to rationalize committing the dishonest
act 'feel a sense of entitlement'
Conditions of Fraud pt 2 - answerRisk factors for misappropriation of
assets- the same three conditions apply to misappropriation of
assets
However, in assessing risk factors, greater emphasis is placed on
individual incentives and opportunities for theft
Assessing the risk of fraud - answerProfessional skepticism-auditing
standards requires that the audit be planned and performed with an
attitude of professional skepticism
Two components:
1.) Questioning mind
2.) Critical evaluation of audit evidence
Assessing the risk of fraud pt 2 - answerSources of information to
assess fraud risks
1.) Communication among the audit team
2.) Inquiries of management
3.) Risk factors
4.) Analytical Procedures
5.) Other information
Responding to Fraud Risks
questions and answers (graded
A+)
Types of Fraud Risk - answer1.) Fraudulent financial reporting
2.) Misappropriation of assets
Fraudulent financial reporting - answerAn intentional misstatement
or omission of amounts or disclosures with the intent to deceive
users
-most cases involve an attempt to overstate income, but can also
understate income (increase liabilities)
-earnings management involves fraud to meet earnings goals
-income smoothing is a form of earning management that shifts
income from year to year to reduce fluctuations
Misappropriation of assets - answerFraud that involves theft of an
entity's assets. Normally perpetrated by lower level employees, but
can involve upper management
Conditions of Fraud - answerThree conditions for fraud are referred
to as the fraud triangle:
1.) Incentives/Pressures- management or other employees have
incentive/pressures to commit fraud
, 2.) Opportunities- circumstances provide opportunities for
management/employees to commit fraud
3.) Attitude/Rationalization- attitude, character, or set of ethical
values exists that allows management/employees to commit a
dishonest act, or they are in an environment that imposes sufficient
pressure that causes them to rationalize committing the dishonest
act 'feel a sense of entitlement'
Conditions of Fraud pt 2 - answerRisk factors for misappropriation of
assets- the same three conditions apply to misappropriation of
assets
However, in assessing risk factors, greater emphasis is placed on
individual incentives and opportunities for theft
Assessing the risk of fraud - answerProfessional skepticism-auditing
standards requires that the audit be planned and performed with an
attitude of professional skepticism
Two components:
1.) Questioning mind
2.) Critical evaluation of audit evidence
Assessing the risk of fraud pt 2 - answerSources of information to
assess fraud risks
1.) Communication among the audit team
2.) Inquiries of management
3.) Risk factors
4.) Analytical Procedures
5.) Other information
