Question

Please provide an example to explain the Fraud & procedures to address the assessed risk of material misstatement due to fraud.

Answer 1

Elements of a fraud.

-Misrepresentation of Fact or Failure to Disclose Material Information

-Knowledge that Person has duty to disclose or that information is false and misleading-Intent to Deceive

-Intent to Induce Reliance

-Actual Reliance

-Justifiable Reliance

-Actual Loss

Fraud refers to the intentional use of trick or deceit with an aim of depriving someone their property, legal right or money. Therefore, anyone who loses heir something due to fraud is entitled in filing a law suit. There are elements that found in a fraud and often one is needed to prove them. These are a representation, falsify of the representation, material of the representation, the knowledge of the speaker of the falsify representation, the intent of the speaker should be relied upon, the ignorance of the hearer of the falsify representation, the reliance of the hearer on the representation, the right of the hearer to relay on the representation, and the consequent and proximate injury of the hearer which was caused by reliance on the representation.

Identifying Risks That May Result in a Material Misstatement Due to Fraud

Types of fraud

a.Fraud auditing is designed to look for six types of fraud, according to Business Network's "Recognizing Fraud Indicators." These are embezzling, bribes, stealing, extortion, "fictitious transactions," kickbacks and conflict of interest. Although not all fraud cases can be easily classified, they will always---at the very least---involve one of these categories. Fraud auditors are trained to look specifically for indicators to any of these fraud types.

b.Intentional misstatements (1) fraudulent financial reporting (2) misappropriation of assets

As risk of misstatement increases, audit procedures may be altered to include more reliable evidence (change nature of evidence), shift tests from interim period to near year-end (change timing of procedures), and by increasing sample sizes for substantive procedures (change extent of procedures). Auditors selection of further audit procedures (test of controls and substantive procedures) based on materiality of account balances, transactions, and disclosures, assessed risks of material misstatement

Auditor’s response to risk assessment

Overall response may include modification of the audit

a. Increased professional skepticism and designing of procedures to obtain more reliable evidence

b.Assign personnel with specialized skills and increased supervision of staff

c.Further consideration of management’s selection and application of accounting principles

d.Performing less predictable auditing procedures