Ll 4 ldentifycorporate governance and other control

This preview shows page 1 - 3 out of 36 pages.

ll-4 ldentifycorporate governance and other control environment factors that reduce fraud risks. t I -5 Develop responses to identified fraud risks. ll-6 Recognize specific fraud risk areas and develop procedures to detect fraud. ll-7 Understand interviewtechniques and other activities after fraud is suspected.
Image of page 1
The classic fraud at McKesson-Robbins illustrates that financial statement fraud is not just a recent occurrence. In the wake of that scandal, the auditing profession responded by setting the first formal standards for auditing procedures. Those standards required confirmation of receivables and observation of physical inventory, procedures that are standard today, plus guidance on the auditor's responsibilities for detecting fraud. In response to more recent frauds, Congress passed the Sarbanes-Oxley Act in 2002 and the AICPA developed specific urditi.rg standards to deal with fraud risk assessment and detection. In this chapter we will discuss the urdito." responsibility to assess the risk of fraud and detect material misstatements due to fraud and describe major areas of fraud risk, as well as controls to prevent fraud and audit procedures to detect fraud. Define fraud and distinguish between fraudulent financial reporting and misappropriation of assets. TYPES OF FRAUD Fraudulent Financial Reporting Misappropriat!on of Assets As a broad legal concept, fraud describes any intentional deceit meant to deprive another person or party oftheir property or rights. In the context ofauditing financial statements, fraud is defined as an intentional misstatement of financial statements' The two main categories are fraudulent financial reporting and misappropriation of assets, which we introduced when defining the auditor's responsibilities for detecting material misstatements in Chapter 6. Fraudulent financial reporting is an intentional misstatement or omission of amounts or disclosures with the intent to deceive users. Most cases involve the intentional mis- statement of amounts, rather than disclosures. For example, WorldCom capitalized as fixed assets billions of dollars that should have been expensed. Omissions of amounts are less common, but a company can overstate income by omitting accounts payable and other liabilities. While most cases of fraudulent financial reporting involve an attempt to oYerstate income-either by overstatement of assets and income or by omission of liabilities and expenses, companies also deliberately understate income. At privately held companies, this may be done in an attempt to reduce income taxes. Companies may also inten- tionally understate income when earnings are high to create a reserye of earnings or "cookie jar reserves" that may be used to increase earnings in future periods.
Image of page 2
Image of page 3

You've reached the end of your free preview.

Want to read all 36 pages?

  • Fall '19

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask You can ask ( soon) You can ask (will expire )
Answers in as fast as 15 minutes