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Unformatted text preview: 1 Chapter 11 Fraud Auditing Review Questions 11-1 Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users. Two examples of fraudulent financial reporting are accelerating the timing of recording sales revenue to increased reported sales and earnings, and recording expenses as fixed assets to increase earnings. 11-2 Misappropriation of assets is fraud that involves theft of an entitys assets. Two examples are an accounts payable clerk issuing payments to a fictitious company controlled by the clerk, and a sales clerk failing to record a sale and pocketing the cash receipts. 11-3 Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users, while misappropriation of assets is fraud that involves theft of an entitys assets. Frauds involving financial reporting are usually larger than frauds involving misappropriation of assets, usually involve top management, and do not directly involve theft of company assets. 11-4 The three conditions of fraud referred to as the fraud triangle are (1) Incentives/Pressures; (2) Opportunities; and (3) Attitudes/Rationalization. Incentives/Pressures are incentives of management or other employees to commit fraud. Opportunities are circumstances that allow management or employees to commit fraud. Attitudes/Rationalization are indications that an attitude, character, or set of ethical values exist that allow management or employees to commit a dishonest act or they are in an environment that imposes sufficient pressure that causes them to rationalize committing a dishonest act. 11.5 The following are example 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. Opportunities Ineffective oversight of financial reporting by the board of directors allows management to exercise discretion over reporting. Attitudes/Rationalization Management is overly aggressive. For example, the company may issue aggressive earnings forecasts, or make extensive acquisitions using company stock. 11-1 11.6 The following are example of risk factors for misappropriation of assets for each of the three fraud conditions: Incentives/Pressures- The individual is unable to meet personal financial obligations. Opportunities There is insufficient segregation of duties that allows the individual to handle cash receipts and related accounting records. Attitudes/Rationalization Management has disregarded the inadequate separation of duties that allows the potential theft of cash receipts....
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