审计学学习指导 (11)

Chapter 11

Fraud Auditing

Chapter 11 provides a focused discussion on the auditor’s responsibility for material misstatements due to fraud, which is critically important to the auditing profession. While auditors have always had a responsibility for the detection of fraud, recent examples of fraudulent financial reporting have greatly increased interest in the subject of fraud auditing. There is tremendous student interest in the subject, and it is important for students to understand the technical requirements of SAS 99, as well as the conditions for fraud and areas of specific fraud risk.

Chapter Opening Vignette –“Accounting Scandal Rocks Public Trust”

Students will have a general awareness of several recent high-profile examples of fraudulent financial reporting, but are generally unaware that there are many other earlier examples. The vignette makes two central points. First, fraudulent financial reporting is not just a recent occurrence. Second, major frauds are often followed by significant changes in the profession. In addition to the requirements for confirmation of receivables and observation of inventory following the fraud at McKesson-Robbins, subsequent waves of fraud later gave rise to peer review and the “expectation gap” auditing standards issued in the late 1980s. We find that this helps students understand the underlying reasons for the Sarbanes-Oxley Act and formation of the PCAOB, and it helps put the recent focus and criticism of the auditing profession into a larger context of events.

Types of Fraud (page 338)

The two types of fraud considered in the context of auditing financial statements were first introduced in Chapter 6, so we do not spend a significant amount of time on this issue. To help illustrate the differences, we ask students to provide specific examples of fraudulent financial reporting and misappropriation of assets for the revenue and collection cycle, acquisition and payment cycle, and inventory and warehousing cycle. We use T-11-1 to record their responses. Students will often be able to provide many examples of misappropriation of assets that they have personally observed, and it often leads to a lively discussion. As students identify numerous types of fraud possibilities, we emphasize that certain immaterial frauds (e.g., petty theft of supplies) fall under the scope of auditor responsibility. This helps illustrate the auditor’s responsibility is in the context of material misstatements in the financial statements. Review questions 11-1, 11-2, and 11-3 are also useful in distinguishing fraudulent financial reporting from misappropriation of assets and requiring students to provide examples of each. Problem 11-30 can be used for the same purpose. Problem 11-26 is good for distinguishing errors from fraud.

(See T-11-1)

Conditions for Fraud (page 340)

We emphasize the fraud triangle included in Figure 11-1(page 340). We use Table 11-1 (page 341) and Table 11-2 (page 342) to describe each of the conditions for fraud for fraudulent financial reporting and misappropriation assets. We then ask students to give more specific examples of incentives and opportunities. T-11-2or Review Questions 11-5 and 11-6 can be used for this purpose. Problem 11-23 is also good for classifying fraud risk factors.

(See Figure 11-1)

(See Tables 11-1 and 11-2)

(See T-11-2)

Assessing the Risk of Fraud (page 343)

We emphasize the importance of professional skepticism, and sources of information to assess the risk of fraud in Figure 11-2 (page 344). We also mention the importance of communication among the audit team and the documentary requirements in SAS 99. The brainstorming among students about possible fraud techniques when completing T-11-1or fraud risk factors when completing T-11-2 provides a nice illustration of how the communication among audit team members about an entity’s susceptibility to fraud risk might be useful in the audit planning process.

(See Figure 11-2)

Corporate Governance Oversight to Reduce Fraud Risks (page 346) We use Figure 11-3(page 349) to illustrate how organizational factors contribute to the risk of fraud. We use Review Question 11-12 to distinguish management’s responsibility for designing and implementing antifraud programs and controls, and the audit committee’s oversight responsibilit y.

We also emphasize that auditors of public companies must also evaluate the effectiveness of the audit committee when reporting on internal controls over financial reporting. PCAOB Standard 2 notes that ineffective oversight by the audit committee is at least a significant deficiency and may be a strong indicator of a material weakness in internal control over financial reporting.

(See Figure 11-3)

Responding to the Risk of Fraud (page 351)

We emphasize the importance of the auditor responding to the risk of fraud. We use T-11-3to discuss the various forms the response can take, and the required procedures to address management override of controls. We ask students to give examples of responses involving the overall conduct of the audit, and responses for specific examples of fraud risk. Review Question 11-13 can also be used for this purpose, and Review Question 11-14 can be used to cover the procedures to address management override of controls.

(See T-11-3)

Specific Fraud Risk Areas (page 353)

The amount of coverage of this topic depends upon the amount of time you wish to spend on fraud auditing, and the extent to which you discuss fraud risk areas in the cycle chapters that follow. Figure 11-4 (page 353) is helpful to indicate specific fraud risk areas. We emphasize that because of materiality, auditors are specifically concerned with fraudulent financial reporting.

(See Figure 11-4)

Because we believe that analytical procedures are an effective warning sign of fraud, we use Table 11-4(page 355) and Table 11-5(page 357) to illustrate the effect of fictitious receivables and inventory on financial ratios.

(See Tables 11-4 and 11-5)

Even though we always cover the sales and collection cycle, we discuss fraud risks related to revenue in Chapter 11 because SAS 99 requires that revenue recognition normally be considered a high fraud risk. Review Question 11-15 is a good one to review the three main ways in which revenue can be manipulated.

We usually review at least one other fraud risk area. We like to review risk of fraudulent financial reporting arising from inappropriately capitalized fixed assets because it is easy for students to understand, and was a central element in WorldCom and other recent fraud cases.

Problems 11-25, 11-27, 11-28, or 11-29 can be used to discuss fraud risks in specific accounting cycles. The ACL Problem 11-33 gives students hands-on experience in how audit software can be effective at identifying potential fraud conditions.

Responsibilities When Fraud is Suspected (page 358)

Figure 11-5(page 359) is useful to indicate that most frauds are detected by internal controls and individuals internal to the organization. We emphasize the importance of considering the effect of fraud on the remainder of the audit.

(See Figure 11-5)

We generally do not spend too much time on inquiry techniques. The types of inquiries and verbal and non-verbal cues (Table 11-6. page 360, and Table 11-7, page 361) can be used for role playing exercises that students generally enjoy.

(See Tables 11-6 and 11-7)

It is also important to emphasize that the discovery of fraud has implications for public company auditors when auditing internal control over financial reporting. PCAOB Standard 2 states that fraud of any magnitude by senior management is at least a significant deficiency and may be a material weakness in internal control over financial reporting. We emphasize that such a discovery may lead to an adverse opinion on internal control over financial reporting.

CHAPTER 11

CROSS-REFERENCE OF LEARNING OBJECTIVES AND PROBLEM MATERIAL

11-5

EXAMPLES OF FRAUDULENT FINANCIAL REPORTING AND MISAPPROPRIATION OF ASSETS

EXAMPLES OF FRAUD RISK FACTORS FOR FRAUDULENT FINANCIAL REPORTING AND MISAPPROPRIATION OF ASSETS

RESPONDING TO THE RISK OF FRAUD

1. Change the overall conduct of the audit

2. Design audit procedures to address identified

risks

3. Design procedures to address management

override of controls

?Examine journal entries and adjustments

?Review accounting estimates for biases

?Evaluate business rationale for unusual

transactions