Professional Review and

Training Center (PRTC)

Considering Risks of
Fraud, Error, and
NOCLAR
(AT.2512)
Leomar R. Cabarles
 Error

• Unintentional misstatements
or omissions in F/S

• Examples:
 Mistakes in accounting data
 Incorrect accounting
estimate or principles
 Fraud

• An intentional act by:

 MGT
 TCWG
 Employees
 Third parties

with use of deception to obtain

an unjust or illegal advantage
 Types of Fraud

Intentional F/S misstatements

1. Fraudulent financial reporting
2. Misappropriation of assets—theft

Perpetrator
1. Management fraud
2. Employee fraud
 Fraudulent Financial Reporting

• Examples:
 Manipulation or falsification
 Misrepresentation or
intentional omission
 Intentional misapplication of
accounting policies

• Normally involves MGT

 Misappropriation of Assets—Theft

• Examples:
 Embezzling receipts
 Lapping of AR
 Funds sent to personal
account
 Use of assets personally

• Often involves ordinary

employees
 Fraud Prevention and Detection

Primary responsibility
of:

MGT • Internal Control

TCWG • Oversight of MGT

 Auditor’s Responsibility

• Reasonable assurance

• F/S free from material

misstatement

• Same responsibility for

fraud and error

• Fraud higher non-detection

Forensic Audit vs. F/S Audit
Auditing Risk of Fraud
 There are three conditions generally present when fraud
occurs.
Attitudes/
Attitudes/
Attitudes/Rationalizations
Rationalizations
Rationalizations

Fraud
Triangle

Incentives/
Incentives/Pressures Opportunities
Opportunities
Pressures
Partners in Learning ©2000-2009 Deloitte Touche Tohmatsu Slide 11
 Withdrawal Due to Fraud

• No remedial action, even

if not material

• Significant and pervasive

fraud

• Incompetence or lack of
integrity of MGT or TCWG
 NOCLAR

• Acts contrary to laws and

regulations

• Includes transactions by
TCWG, MGT or employees
on behalf of the entity

• Excludes personal misconduct

unrelated to entity’s business
Responsibility of MGT and TCWG

Conduct operations in
accordance with laws and
regulations
Responsibility of Auditor
Auditing for Laws and Regulations
Difficulty of Auditing for Non-compliance

• Operational in nature
• Concealed (e.g. collusion,
forgery)
• Matter of legal
determination by a court
• Error
• Fraud
 Types
 Fraud prevention and
detection responsibility
 Auditor’s responsibility
 Auditing risk of fraud
 Withdrawal due to fraud
• Noncompliance

 Types of laws and regulation

 Compliance responsibility

 Auditor’s responsibility

 Auditing compliance

 Difficulty of auditing for non-

compliance
-now do the DIY drill-
 DIY Drill Answers

1. A
2. C
3. B
4. C
5. C
 DIY Drill Answers

6. D
7. D
8. B
9. C
10. D
 DIY Drill Answers

11. C
12. C
13. A
14. B
15. A
 end of AT.2512 