Louwers_3eChap003 - Financial Statements: Errors, Frauds...

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Financial Statements: Errors, Frauds and Illegal Acts Errors are unintentional misstatements or omissions of amounts or disclosures in financial statements. Management Fraud is intentional misstatements or omissions of amounts or disclosures in financial statements. Direct-effect illegal acts are violations of laws or government regulations by the company or its management or employees that produce direct and material effects on dollar amounts in financial statements . "Illegal acts" (far‑removed) are violations of laws and regulations that are far removed from financial statement effects (for example, violations relating to insider securities trading, occupational health and safety, food and drug administration, environmental protection, and equal employment opportunity).
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Overview of Auditors’ and Other Professionals’ Responsibilities External Auditors (CPAs) SAS 99: Consideration of Fraud in a Financial Statement Audit Design audit to provide reasonable assurance of detecting fraud that could have a material effect on the financial statements. Perform fraud-related procedures SAS 54: Illegal Acts Focused primarily is on direct-effect illegal acts SAS 114: “The Auditor’s Communication with Those Charged with Governance
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Considering the Risk of Fraud (SAS 99) Gather information to identify risks. Identify risks. Assess risks taking into account entity’s programs and controls. Respond to results of assessment. Step 1: Audit team discussion (“brainstorming”) Step 2: Identify information necessary to assess fraud risk factors Step 3: a. Identify and b. Assess fraud risk factors Step 4: Respond to risk assessment Step 5: Evaluate audit evidence Step 6: Communicate fraud matters Step 7: Document fraud matters
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Step 1: Audit team discussion (“brainstorming”) Required procedure Objectives Gain understanding of Previous experiences with client How a fraud might be perpetrated and concealed in the entity Procedures that might detect fraud Set proper tone for engagement Discussions should be ongoing throughout the engagement
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Step 2: Obtain Information to Identify Risks Inquiries Management Audit committee Internal auditors Others Planning analytical procedures Net income to cash flows (total accruals to total assets) Days sales in receivables Gross margin Sales growth index
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Step 3a: Identify Risk Factors Related to Fraudulent Financial Reporting Management’s characteristics and influence Industry conditions Operating characteristics and financial stability
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Risk Factors: Management’s Characteristics and Influence Management has a motivation to engage in fraudulent reporting. Management decisions are dominated by an individual or a small group.
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This note was uploaded on 04/08/2010 for the course AEM 4530 taught by Professor Lewis during the Spring '10 term at Cornell University (Engineering School).

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Louwers_3eChap003 - Financial Statements: Errors, Frauds...

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