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Chapter 4: Fraud and Error

Part 4 objectives
Distinguishes fraud and error and describe 2 types of fraud that relevant to the auditor; Describes the responsibilities of management of the entity and auditors for fraud and error Procedures when there is an indicate that Fraud & Error may exit Reporting of Fraud & Error

Fraud and error


Misstatement in FSs arise from fraud and error The reactions of auditor to misstatement caused by fraud and error are different

Error
Error: refers to an unintentional misstatement in FSs, including the omission of an amount or a disclosure, such as: A mistake in gathering or processing data from which FSs are prepared. An incorrect accounting estimate arising from oversight or misinterpretation of facts. A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation or disclosure.

Fraud
Fraud: refers to an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage Fraud involving management is referred to as management fraud; Fraud involving only employees of entity is referred to employee fraud

Fraud
2 types of Fraud - Fraudulent Financial reporting - Misappropriation of assets

Fraud- Fraudulent Financial Reporting


Involves intention misstatements including omissions of amounts or disclosures in financial statements to deceive financial statement users - Manipulation accounting records or supporting documentation from which FS are prepared. - Misrepresentation in events, transactions or other significant info. - Intentional misapplication of acc principles

Fraud- Fraudulent Financial Reporting


Involves management override (khng nghe theo) of controls that otherwise may appear to be operating effectively. Cause from: - Management earning; - Pressures and incentives: pressures to meet market expectations or a desire to maximize compensation based on performance

Fraud- Misappropriation of assets


Misappropriation (s tham ) of assets involves the theft of an entitys assets and is often perpetrated ( gy ra) by employees in relatively small and immaterial (vn vt )amounts. E.g.: - Embezzling (bin th, tham ) receipts - Stealing physical assets; - Using an entitys assets for personal use - .

Responsibilities of those Charged with Governance and of Management


The responsibility for the prevention, detection and handling of fraud and error through the implementation and continued operation of adequate accounting and internal control systems. Because of the inherent limitations of the accounting and internal control systems, it is impossible to eliminate the possibility of fraud and error.

Responsibilities of the Auditor and the Audit Firm


The auditor and the audit firm are to assist the client entity in detecting, handling and deterring fraud and error;
The auditor and the audit firm are not and cannot be held responsible for the prevention of fraud and error in the client entity.

Inherent Limitations of an Audit


Owing to the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with ISAs.

Inherent Limitations of an Audit


the use of judgment; the use of testing; the inherent limitations of internal control; the audit evidence available to the auditor is persuasive rather than conclusive in nature.

Inherent Limitations of an Audit


The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not detecting a material misstatement resulting from error the risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud

Inherent Limitations of an AuditProfessional Skepticism


Professional Skepticism?? The auditor should maintain an attitude of professional skepticism throughout the audit, recognizing the possibility that a material misstatement due to fraud could exist, notwithstanding the auditors past experience with the entity about the honesty and integrity of management and those charged with governance.

Procedures when there is an indication that Fraud or Error May Exist


If the auditor and the audit firm believe the indicated fraud or error could have a material effect on the FS should perform appropriate modified or additional procedures (thc hin quy trnh b sung/thm) Discuss the matter with management in case that additional procedures are not dispelled the auditor suspicion.

Reporting of Fraud and Error


To the Director, in cases: - the auditor suspects fraud may exist, even if the potential effect on the financial statements has not been measured; - fraud is found to exist; or - significant error is found to exist. Often, report the matter to a level in the organization structure of the entity above that responsible for the persons believed to be implicated

Reporting of Fraud and Error


To Regulatory and Enforcement (s p buc) Authorities: - When frauds are raised as to the involvement of the highest authority - Confidential requirement the auditor and the audit firm may need to seek legal advice in advance in such circumstances

Reporting of Fraud and Error


To users of the Audit Report on the Financial Statements : - Which audit report is prepared?