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Unformatted text preview: Chapter 03 - Management Fraud and Audit Risk CHAPTER 3 Management Fraud and Audit Risk LEARNING OBJECTIVES Review Checkpoints Exercises, Problems and Simulations a. Define and explain the differences among several kinds of fraud, errors, and illegal acts that might occur in an organization. 1 43 b. Explain auditors’ responsibilities with respect to detecting and reporting fraud. 2, 3 45, 53, 56, 57, 60, 62 c. List and explain some conditions that can lead to fraud. 4, 5 46, 50, 63 d. Explain auditors’ responsibilities with respect to illegal acts. 6 61 e. Describe the conceptual audit risk model and explain the meaning and importance of its components in terms of professional judgment and audit planning. 7, 8, 9, 10 47, 51, 55, 58, 59 f. Define materiality and explain its relationship to the audit risk model. 11, 12 g. List and describe eight general types of audit procedures for gathering evidence. 13, 14, 15, 16 44, 48, 49, 52 h. Describe the content and purpose of an audit plan. 17, 18, 19 54 3-1 Chapter 03 - Management Fraud and Audit Risk SOLUTIONS FOR REVIEW CHECKPOINTS 3.1 White collar crimes are frauds perpetrated by people who work in offices and steal with a pencil or a computer terminal. The contrast is violent street crime. Employee fraud is the use of fraudulent means to take money or other property from an employer. It consists of three phases: (1) the fraudulent act, (2) the conversion of the money or property to the fraudster’s use and (3) the cover-up. Embezzlement is a type of fraud involving employees or nonemployees wrongfully taking funds or property entrusted to their care, custody, and control, often accompanied by false accounting entries and other forms of lying and cover-up. Larceny is simple theft of an employer’s property that is not entrusted to an employee’s care, custody or control. Defalcation is another name for employee fraud and embezzlement. Errors are unintentional 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). 3.2 AICPA auditing standards require that: a. audit team members have an understanding and awareness of signs of errors, frauds (including direct-effect illegal acts), and indirect-effect illegal acts....
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- Spring '10