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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 11 11-1.

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Presentation on theme: "Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 11 11-1."— Presentation transcript:

1 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Chapter 11 11-1

2 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-2 Define fraud and distinguish between fraudulent financial reporting and misappropriation of assets. Describe the fraud triangle and identify conditions for fraud. Understand the auditor’s responsibility for assessing the risk of fraud and detecting material misstatements due to fraud. Prepare the post-closing trial balance

3 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-3 Identify corporate governance and other control environment factors that reduce fraud risks. Develop responses to identified fraud risks. Recognize specific fraud risk areas and develop procedures to detect fraud. Understand interview techniques and other activities after fraud is suspected.

4 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Define fraud and distinguish between fraudulent financial reporting and misappropriation of assets. 11-4 1 1

5 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-5 Management Fraud Fraudulent financial reporting Misappropriation of assets

6 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Describe the fraud triangle and identify conditions for fraud. 11-6 2 2

7 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-7 Incentives/Pressures OpportunitiesAttitudes/Rationalization

8 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-8

9 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-9 Incentives/Pressures:  Financial stability or profitability is threatened by economic, industry, or entity operating conditions  Excessive pressure exists for management to meet debt requirements  Personal net worth is materially threatened

10 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-10 Opportunities:  There are significant accounting estimates that are difficult to verify  There is ineffective oversight over financial reporting  High turnover or ineffective accounting, internal audit, or information technology staff exists

11 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-11 Attitudes/Rationalization:  Inappropriate or inefficient communication and support of the entity’s values is evident  A history of violations of laws is known  Management has a practice of making overly aggressive or unrealistic forecasts

12 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-12 Incentives/Pressures:  Personal financial obligations create pressure to misappropriate assets  Adverse relationships between management and employees motivate employees to misappropriate assets

13 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-13 Opportunities:  There is a presence of large amounts of cash on hand or inventory items  There is an inadequate internal control over assets

14 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-14 Attitudes/Rationalization:  Disregard for the need to monitor or reduce risk of misappropriating assets exists  There is a disregard for internal controls

15 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Understand the auditor’s responsibility for assessing the risk of fraud and detecting material misstatements due to fraud. 11-15 3 3

16 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-16 Auditing standards provide guidance to Auditors in assessing the risk of fraud. Auditing standards state that, in exercising Professional skepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.”

17 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-17

18 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-18  Discussion among engagement team  Procedures performed to assess risk  Specific risks and audit response  Reasons supporting conclusions  Results of procedures performed  Other conditions and analytical relationships  Nature of communications

19 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Identify corporate governance and other control environment factors that reduce fraud risks. 11-19 4 4

20 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-20 1.Culture of honesty and high ethics 2.Management's responsibility to evaluate risks of fraud 3.Audit committee oversight

21 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-21  Organizational code of conduct  General employee conduct  Conflicts of interest  Outside activities, employment, and directorships

22 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-22  Relationships with clients and suppliers  Gifts, entertainment, and favors  Kickbacks and secret commissions  Organization funds and other assets

23 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-23  Organization records and communications  Dealing with outside people and organizations  Prompt communications  Privacy and confidentiality

24 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-24

25 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Develop responses to identified fraud risks. 11-25 5 5

26 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-26 Change the overall conduct of the audit to respond to identified fraud risks. Design and perform audit procedures to address fraud risks. Design and perform procedures to address the risk of management override of controls.

27 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Recognize specific fraud risk areas and develop procedures to detect fraud. 11-27 6 6

28 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-28  Revenue and accounts receivable fraud risks  Inventory fraud risks  Purchases and accounts payable fraud risks  Other areas of fraud risk

29 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-29

30 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-30

31 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. Understand interview techniques and other activities after fraud is suspected. 11-31 7 7

32 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-32

33 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-33 Informational Assessment Interrogative Evaluating responses Observing behavioral cues Listening

34 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-34

35 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-35

36 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-36

37 Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall. 11-37 Copyright All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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