Chapter 11 Instructor's Guide

Chapter 11 Instructor's Guide - Chapter 11 Fraud Auditing...

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Chapter 11 Fraud Auditing Chapter 11 provides a focused discussion on the auditor’s responsibility for material misstatements due to fraud, which is critically important to the auditing profession. While auditors have always had a responsibility for the detection of fraud, recent examples of fraudulent financial reporting have greatly increased interest in the subject of fraud auditing. There is tremendous student interest in the subject, and it is important for students to understand the technical requirements of SAS 99, as well as the conditions for fraud and areas of specific fraud risk. Chapter Opening Vignette – “Accounting Scandal Rocks Public Trust” Students will have a general awareness of several recent high-profile examples of fraudulent financial reporting, but are generally unaware that there are many other earlier examples. The vignette makes two central points. First, fraudulent financial reporting is not just a recent occurrence. Second, major frauds are often followed by significant changes in the profession. In addition to the requirements for confirmation of receivables and observation of inventory following the fraud at McKesson-Robbins, subsequent waves of fraud later gave rise to peer review and the “expectation gap” auditing standards issued in the late 1980s. We find that this helps students understand the underlying reasons for the Sarbanes-Oxley Act and formation of the PCAOB, and it helps put the recent focus and criticism of the auditing profession into a larger context of events. Types of Fraud (page 338) The two types of fraud considered in the context of auditing financial statements were first introduced in Chapter 6, so we do not spend a significant amount of time on this issue. To help illustrate the differences, we ask students to provide specific examples of fraudulent financial reporting and misappropriation of assets for the revenue and collection cycle, acquisition and payment cycle, and inventory and warehousing cycle. We use T-11-1 to record their responses. Students will often be able to provide many examples of misappropriation of assets that they have personally observed, and it often leads to a lively discussion. As students identify numerous types of fraud possibilities, we emphasize that certain immaterial frauds (e.g., petty theft of supplies) fall under the scope of auditor responsibility. This helps illustrate the auditor’s responsibility is in the context of material misstatements in the
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Chapter 11 Instructor's Guide - Chapter 11 Fraud Auditing...

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