Ch3 Reading Review Checkpoints

Ch3 Reading Review Checkpoints - Important Note re Chapter...

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Important Note re: Chapter Review Checkpoint questions: As you read and study each of chapter content thoroughly, please try to answer the review checkpoint questions (within chapter content) on your own prior to reading the following notes. Answers to Chapter Reading Review Checkpoints-ch.3 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. b. the audit be designed to respond to knowledge of fraud risks and provide reasonable assurance of detecting material errors and frauds (including direct-effect illegal acts). c. audit team members should have the proper degree of professional skepticism, assuming neither dishonesty nor unquestioned honesty of management. d. for reporting, the materiality concept is different for errors, fraud, and illegal acts. For errors, the usual idea of materiality prevails; for frauds (including direct-effect and far-removed illegal acts) immateriality is expressed in terms of “clearly inconsequential.” Matters that fall below the threshold apparently can be reported to levels of management below the board of directors and audit committee. More significant matters are reported to the director level, and management involvement in frauds and illegal acts is never considered inconsequential.
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3.3 The seven steps specified by SAS 99: Consideration of Fraud in a Financial Statement Audit are: Step 1:  Engagement Team Discussion (“Brain Storming”)
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Ch3 Reading Review Checkpoints - Important Note re Chapter...

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