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ACCT_3444_Chapters_11_and_13 - Accounting 3444 Week 7...

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Accounting 3444 Week 7 Chapter 11- Fraud Auditing Chapter 13 - Audit Sampling Concepts Hand in Chapter 11and 13 Homework Assignment Chapter 11- Fraud Fraud- 2 forms - 1. Fraudulent Financial Reporting= Intentional “Cooking the Books”- more likely conducted by Senior Mgmt 2. Misappropriation of Assets= Theft- more likely conducted by lower level staff Need to be aware of and consider both as if either has occurred, the perpetrators try to conceal it. 3 Conditions of Fraud – the Auditor needs to be aware of and assess: (1) Incentives/Pressures (2) Opportunities (3) Attitudes/Rationalization The following are examples of risk factors for fraudulent financial reporting for each of the three fraud conditions: Incentives/Pressures: The Company is under pressure to meet debt covenants or obtain additional financing, managements bonus is tied to results, pressure to meet analyst expectations Opportunities: Ineffective oversight of financial reporting, lack of / ineffective controls Attitudes/Rationalization: Management is overly aggressive. For example, the company may issue aggressive earnings forecasts, or make extensive acquisitions using company stock/ Everybody does it…… In Class Exercise- 11-22 Mgmt is responsible for preventing fraud. 1
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One key way is by promoting a culture of honesty and high ethics mgmt This should include the following: 1. Setting a “tone at the top” that promotes ethical behaviour- have a Code of Conduct 2. Creating a positive workplace environment that improve workplace morale, including a whistle-blower hotline 3. Hiring and promoting employees who are screened, have the suitable level of education and employment history, and appear likely to act with honesty and integrity 4. Train employees to do their jobs properly and to recognize warning signs of fraud 5. Confirm annually employee responsibilities for complying with a written code of conduct 6. Discipline employees for non-compliance with the company’s code of conduct and other practices While management is responsible for implementing effective controls etc. the auditor must consider fraud in the following manner: 1. Maintain and attitude of Professional Skepticism Have a questioning mind- set aside any prior beliefs Conduct a critical evaluation of the audit evidence- especially when relying upon the representations of management. 2.
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ACCT_3444_Chapters_11_and_13 - Accounting 3444 Week 7...

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