1 fraud management’s responsibility auditor’s consideration
Post on 18-Dec-2015
227 Views
Preview:
TRANSCRIPT
2
Management’s Responsibility
To design and implement programs and controls
that prevent, deter and/or detect
FRAUD
3
Auditor’sConsideration
When and how does the auditorlook for fraud indicators?
Statement on Auditing Standards Number 99(Codification AU §316)
(Guidelines for Management)
4
We will cover the auditor’s considerations first
Sets the tone for the audit
Readily available guidelines
Directs management’s behavior
5
What is fraud?
An intentional act that results in a material misstatement in the financial statements that are the subject of an audit. (Note: Fraud is a legal concept; auditors do not make legal determinations.)
(Note: the auditor should plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement – intentional or unintentional.)
Two types fraudulent financial reporting misappropriation of assets
6
What is fraud? (cont’d)
Fraudulent reporting may result from: a misstatement or omission of amounts or
disclosures designed to deceive FS users because GAAP was not followed
an indefensible interpretation of complex accounting rules
temporary misstatements expected to be corrected later
7
What is fraud? (cont’d)
Misappropriation of assets (theft or defalcation) may involve a theft resulting in non-GAAP, such as embezzling receipts, stealing assets, causing payment for goods or services not received
This section is only concerned with those misappropriations that cause the FS not to be fairly presented, in all material resects, in conformity with GAAP
8
What is fraud? (cont’d)
Conditions usually present when fraud occurs:
incentive or pressure opportunity due to weak controls ability to rationalize following
questionable ethical values
9
What is fraud? (cont’d)
Other considerations: Management has a unique ability to
perpetuate fraud by overriding controls. Fraud may be concealed by withholding
evidence, misrepresenting information in response to inquiries, or falsifying documentation.
Fraud may be concealed through collusion.
Some evidence may look like fraud when in fact it results from unexpected or unusual conditions.
10
What is fraud? (cont’d)
Keys for school personnel and auditors: Consider where incentives and
opportunities for fraud exist Design controls to prevent or detect it.
11
Audit engagement personnel discussions re: fraud risk
Engagement personnel should “brainstorm” how and where FSs are susceptible to material
misstatement due to fraud how management could perpetrate and conceal
fraudulent financial reporting how assets could be misappropriated
Consider incentive, opportunity, and environment (attitudes and rationaliza-tions).
Communication about the possibility of fraud should continue throughout the audit. (Professional Skepticism)
12
Obtaining info identifying risks of material misstatement due to fraud
Make inquiries of management and others about their views of the risk of fraud and how the risks are addressed.
Consider unusual or unexpected relationships in performing analytical procedures in planning the audit.
Consider the existence of one or more fraud risk factors.
13
Obtaining info re risks (cont’d) -- Inquiries
Inquiries of management about: knowledge of fraud or suspected fraud, allegations
of fraud, understanding of risks of fraud, anti-fraud programs and controls, monitoring at campuses, views on ethical behavior.
reports to the audit committee re fraud Inquiries of the audit committee about
exercise of oversight in mitigation of fraud risks
Inquiries of the internal audit personnel about: views of the risk of fraud, procedures to detect
fraud, and management’s responses
14
Obtaining info re risks (cont’d) -- Inquiries
Inquiries of others Federal programs coordinator, Special
education director, State comp ed director Student attendance accounting personnel PEIMS coordinator Principals, campus secretaries, bookkeepers,
etc. Transportation and plant maintenance
personnel Legal counsel Food service personnel
15
Obtaining info re risks (cont’d) – Analytical Procedures
Consider using FEISTIER Consider trends and interim
measurements enrollment property values employment in the area AEIS scores federal grants
Consider academic standing TAKS Scores Dropout rate
16
Obtaining info re risks (cont’d) – Risk Factors and Other Information
Incentive pressure Administrative cost ratio DIP/CIP TAKS, Special Education, At Risk 85% rules
Opportunity Goal congruency
Attitude/rationalizations Aggressive accounting interpretation Interim measures or scores adjust
17
Identifying risks that may result in material misstatement due to fraud
With each risk identified, consider: the type – i.e. fraudulent reporting vs.
misappropriation of assets its significance – i.e. magnitude the likelihood it will result in material
misstatement in the financial statements whether it is pervasive or specifically related to
an account or type of transaction Presume that improper revenue
recognition is a fraud risk Consider the risk of management override
of controls
18
Assessing risks in re evaluation of entity’s programs and controls
Understand the five components of internal control of the client’s system.
Identify types of potential misstatements and consider factors that affect the risk of material misstatement.
Design tests of controls and substantive tests.
Consider that controls can be circumvented by collusion or management override.
Evaluate whether client’s controls address identified risks and are in operation.
19
Responding to the results of the assessment
Are additional or different audit procedures needed?
Is additional corroborating evidence needed?
If additional procedures designed to address the risks of material misstatement due to fraud are not practicable, consider withdrawing from the engagement with communication to appropriate parties.
20
Responding to the results of the assessment (cont’d)
Overall response to the risk of material misstatement: assignment of personnel and
supervision (IT personnel, special education consultants, etc.)
accounting principles (federal programs, state funding, attendance records, etc.)
predictability of auditing procedures
21
Responding to the results of the assessment (cont’d)
Nature, timing, and extend of procedures to address the identified risks from fraudulent financial reporting
Additional examples of responses to identified risks of misstatement revenue recognition tests activity fund tests inventory tests administrative actions such as “at risk”
designations, ARD results, attendance accounting
Risks for misappropriations of assets
22
Responding to the results of the assessment (cont’d)
Consider the risk of management override of controls regular entries, adjusting entries, consolidating
entries, closing entries adjustments directly to the financial
statements Controls over automated entries
Evaluate the rationale for significant unusual transactions.
23
Evaluating Audit Evidence
Assessing risks of material misstatement due to fraud throughout the audit
discrepancies in accounting records conflicting or missing evidential matter problematic or unusual relationships between
the auditor and management
Evaluating whether analytical procedures (substantive tests or overall review) indicate previously unrecognized risk of material misstatement due to fraud
24
Evaluating Audit Evidence (cont’d)
Evaluating risks at or near completion of fieldwork
Responding to misstatements that may be the result of fraud Not material – evaluate the implications,
especially those dealing with the organizational position of those involved
Material – gather more evidence, extend the engagement scope, suggest conference with legal counsel
25
Communicating about fraud to mgmt, audit committee, and others
Communicate findings to appropriate level of management, even if inconsequential.
If senior management is involved, report to the audit committee.
When the risks involve continuing controls, consider whether they are reportable conditions that should be communicated to senior management and the audit committee.
26
Communicating about fraud to mgmt, aud com, and others (cont’d)
The auditor may report to parties outside the school district when: related to compliance with certain legal
or regulatory requirements to successor auditor due to subpoena required by a funding agency
27
Documenting the auditor’s consideration of fraud
Documentation of discussion among engagement personnel
Procedures performed to obtain information necessary to identify and assess the risks of material misstatement due to fraud
Specific risks identified If improper recognition of revenue has not been
identified, support for the auditor’s conclusions Considerations of management overrides Reasons for additional procedures or other
responses The nature of communications about fraud made
to management, the audit committee, and others
28
Part of the Overall Audit Process
Integrated in the planning and supervision considerations
Considered when determining audit risk and setting
materiality thresholds evaluating internal controls
Management’s responsibility
29
Management’s Responsibility
Considering the Potential for Fraud
Designing and ImplementingPrograms and Controls
30
Considering the Potential for Fraud
Financial statement misstatements Revenues – attendance, taxes, grants Expenses – supplies, payroll, consulting,
equipment, travel Fund balances – adjustments, evaluation
Misappropriation of assets Cash disbursements Cash receipts Equipment Reimbursements
31
Designing/ImplementingPrograms/Controls
Control environment Ethics seminars Other training
Risk assessment Special review of the auditor Reviews by TEA
Control activities Organizational structure (segregation of
duties) Performance reviews Information processing
top related