 Learning Objectives

1. Differentiate fraud and error.

2. Enumerate types of frauds relating to F/S
misstatement.
3. Discuss management and TCWG’s and
auditor’s responsibilities regarding fraud.
4. Discuss the auditor’s considerations of risks
and fraud.
5. Cite instances the auditor may withdraw from
engagement due to fraud.
6. Discuss the auditor’s consideration of
NOCLAR in F/S audit.
 FRAUD – an intentional act by one or
more individuals among management,
TCWG, employees, or third parties
involving the use of deception to obtain
an unjust or illegal advantage .
 ERROR – is unintentional misstatements
or omissions in F/S, including the omission
of an amount or disclosure, such as:

 Mathematical or clerical mistakes in records,

gathering and processing data

 Incorrect accounting estimate due to oversight or

misinterpretation of facts

 Mistake in application of accounting principles

Common Examples of Fraud
 Embezzlement
 Larceny
 Forgery
 Bribery
 Extortion
 Conspiracy
 Earnings Management
 Income smoothing

2 Types of Intentional Misstatements

1. Fraudulent Financial Reporting
 Manipulation or Falsification of accounting records
 Misinterpretation in the F/S
 Intentional misapplication of accounting principles
2. Misappropriation of Assets
 Stealing physical assets or intellectual property
 Causing an entity to pay for goods and services not received
 Using an entity’s assets for personal use
 Antifraud Internal Controls for Antifraud Objectives
1. Risk Assessment Process Identify fraud risks factors and fraud
shenanigans
2. Control Environment Create a culture of honesty and ethical behavior

3. IS and Communication Effective communication of antifraud policies and

procedures

4. Control activities Policies and procedures that prevent and detect

fraud risks

5. Monitoring Monitor, as well as remediate deficiencies found

Comparison of Forensic Audit and F/S Audit
 Auditor’s Consideration of Fraud
Conclusion and
Risk Assessment Risk Response
Reporting

Perform RAP Perform overall Perform concluding

responses to fraud analytical procedures
Perform discussions
among the Perform intensive Obtain written
engagement team procedures for representations
specific risks
Identify and assess On all audits, Evaluate audit
ROMM due to fraud consider the evidence obtained
by considering: possibility of
Communicate audit
1. Fraud Risk management
results about fraud to
factors and override of controls
management and TCWG
fraud triangle on adjusting journal
2. Internal Controls entries, accounting
Document consideration
that address the estimates, and
of fraud
identified risks unusual transactions

PROFESSIONAL JUDGMENT AND SKEPTICISM

 Fraud risk factors – refer to events or conditions that
indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud.

 The Fraud Triangle

ATTITUDES/ INCENTIVES/
RATIONALIZATION PRESSURES

OPPORTUNITY
Fraud Risks Responses
o Overall Responses to Fraud: F/S Level ROMM

 Heightened professional skepticism;

 People with specialized skills/knowledge, such as information
technology(IT);
 Development of specific procedures to identify the existence of fraud; and
 An element of unpredictability in selecting audit procedures

o Specific Responses to Potential Fraud Risks: Assertion Level

ROMM

 Change nature, timing, and extent of procedures to address the risk

 Perform further work to evaluate the reasonableness of management’s
estimates and the underlying judgments and assumptions
 Increase sample sizes or perform SAP at a more detailed level
 Using computer-assisted audit techniques(CAATs)
Exceptional Circumstances that may arise that may
bring into question the auditor’s ability to continue
performing the audit:

a) The entity takes no appropriate action about fraud, even if

not material to F/S
b) The ROMM due to fraud and the results of audit tests
indicate a significant risk of material and pervasive fraud:
or
c) Significant concern about the competence or integrity of
management or TCWG
Effects of Laws and Regulations
Laws and Regulations

Effect on F/S Direct Indirect

Not reported in F/S;

instead, primarily
operational in nature.
However, non-
Amount and compliance may
Result of disclosures are result in fines,
Compliance reported on F/S litigation or other
consequences for
the entity that may
have a material
effect on the F/S

Labor laws,
Examples Tax laws, pension environmental
laws(RA 7641) protection laws, health
laws, operating
license, regulatory
solvency requirements
 Responsibility for Compliance with Laws and
Regulations

 Maintaining a register of significant laws, and a record of any

complaints received;
 Monitoring legal requirements and designing procedures/internal
controls to ensure compliance with these requirements;
 Engaging legal advisors to assist in monitoring legal requirements;
and
 Developing, publicizing, implementing, and following a code of
conduct.

 Auditor’s Consideration of Laws and Regulations

a. Direct Effect – obtain sufficient appropriate audit evidence

regarding compliance
b. Indirect Effect – limited to undertaking specified audit procedures
to help identify non-compliance; and
c. To respond appropriately to instances of NOCLAR
 Considering Laws and Regulations
Conclusion and
Risk Response
Reporting

For Direct Effect:

Obtain General Obtain written
• Read minutes, documents,
Understanding of: representations that all
correspondence, etc.
1. Legal and known instances of
• Inquire of MGT and legal
Regulatory NOCLAR have been
counsel about litigation and
Framework. disclosed to auditor
claims; and
2. Entity’s
• Perform TOD
Compliance
For Indirect Effect: Form an appropriate
Identify and assess 1. Inquire of management opinion
ROMM due to and TCWG about
NOCLAR compliance; and Determine whether to
2. Inspect correspondence report NOCLAR to an
with regulatory authorities outside authority
If identified or suspected NOCLAR:
1. Understand nature and circumstances to evaluate Document results and
possible effect on F/S. 2. Discuss with management findings
and TCWG on a timely basis. 3. May obtain legal
advice. 4. Evaluate other audit implications
 Any
Questions?

Thank you for cooperating

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