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Unformatted text preview: ACCY360/560 Auditor's Responsibilities Related to Fraud & Illegal Acts Chapter #3 (Continued) I. Consideration of Fraud in a F/S Audit (SAS #99 was issued late in 2002 to replace SAS #82, which was issued in 1997 to replace SAS #53, which was issued in 1988, etc.); SAS #99 clarifies, but does not fundamentally change the auditors responsibility to detect fraud A. Error v. Fraud (fraud is intentional) auditors must now explicitly consider risks associated with 2 types of fraud 1. Fraudulent financial reporting 2. Misappropriation of assets B. Auditor's basic responsibilities must assess (consider & document) the risk of material misstatement due to fraud in every audit [both fraudulent financial reporting & misappropriation of assets] 1. Planning required to design (plan) audit to provide reasonable assurance of detecting errors & fraud that are material to F/S 2. Field work exercise "due care"; maintain appropriate degree of "professional skepticism," [now there is a presumption that revenue recognition is a risk of material fraud what does that mean?] 3. Q: Does failure to detect a material irregularity imply a substandard audit? A: No! May be unable to detect due to forgery, collusion, upper management involvement, etc. 4. Audit planning r isk factors relating to fraudulent financial reporting a. Incentives/pressures to commit fraudulent financial reporting (1.) Financial stability/profitability is threatened by economic conditions: e.g., operating losses threaten bankruptcy; recurring negative cash flows from operations; vulnerability to rapid changes due to technology or other factors; increasing business failures in the industry; unusual profitability relative to the industry (2.) Excessive pressure to meet the expectations of outsiders : e.g., overly optimistic press releases; marginal ability to meet exchange listing requirements; difficulty meeting debt covenants; need to obtain additional financing to stay competitive b. Opportunities to commit fraudulent financial reporting (1.)(1....
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This note was uploaded on 04/22/2011 for the course ACCY 360 taught by Professor T during the Spring '08 term at Northern Illinois University.
- Spring '08