1. SAS 99: Consideration of Fraud in a Financial Statement Audit

2. Overall Requirement An audit should ______and _________ to obtain _________ ___________about whether the financial statements are free of _______ ________, whether caused by _______ or ______. An audit requires ____________, which in turn requires that the auditor exercise _______ ___________.

3. Causes of Misstatements Causes Errors Intent? Fraud __________ _____________ _________ of __________ __________

4. Types of Fraud—multiple choice Which of the following describe situations involving misappropriation of assets? a. An accounts receivable clerk steals customer payments and writes them off as sales returns and allowances. b. A controller directs staff to record journal entries to recognize revenue as production lots are completed rather than when they are shipped because sales are virtually assured for the products. c. A purchasing manager receives a large gift from a key supplier after signing a contract to purchase parts from the supplier for the next two years. d. All of the above involve misappropriation of assets e. Both a. and c. above involve misappropriation of assets.

5. Professional Skepticism An auditor with professional skepticism has a _________ mind. –A. accusing –B. questioning –C. disbelieving The skeptical auditor –A. recognizes the possibility of material misstatement due to fraud –B. Assumes that the financial statements are misstated due to fraud. –C. Takes care to ensure that client screening procedures ensure that the firm will not audit any clients who could possibly be involved in fraud. An auditor should not be satisfied with less than ________evidence. –A. Irrefutable –B. Persuasive

6. Fraud Conditions (“Fraud Triangle”) ________ (_________) Fraud __________ ______________ (________)

7. Steps involved in Considering the Risk of Fraud 1.Staff ___________ 2.Obtain information needed to ________ _____ 3.Identify _______ 4.________ identified risks 5.____________ to results of assessment 6.Evaluate ________ __________ 7.______________ about fraud 8.___________ consideration of fraud

8. Step 1—Staff Discussion of the Risk of Fraud Brainstorm –Characteristics of a good brainstorming session Don’t judge me! Quantity over quality Everybody’s equal –Research shows that audit brainstorming actually reduces the quantity of ideas but improves the quality of ideas. Consider how and where financial statements might be susceptible to fraud Exercise professional skepticism

9. Step 2—Obtain information needed to identify risk of fraud From which of the following sources could an auditor get information about the possibility of fraud? –a. Inquiry of management –b. Inquiry of the accounting staff –c. Communication with the audit committee –d. Analytical procedures –e. All of the above. Remember the _______ _______—know the risk factors. Know your client

10. Step 3—Identify Risks that may Result in Fraud and Consider ______ of risk __________ of risk (magnitude) ___________ of Risk ___________ of risk

11. Step 4—Assess the identified risks after considering programs and controls Consider understanding of internal control Evaluate whether programs and controls address the identified risks Assess risks taking into account this evaluation

12. Step 5—Respond to Results of the Assessment As risk increases Overall responses –__________staff –More attention to _________ __________ –Less _____________ procedures Specific responses –Consider need to increase evidence by altering the ________, _______ and _______ of audit procedures

13. Step 5—Respond to Results of the Assessment (concluded) On all audits, the auditor should consider the possibility of _________ _________of controls and examine: –__________ journal entries –Accounting _________ –__________ _________transactions

14. Source: http://www.sec.gov/litigation/complaints/comp18174.htm

15. Step 6—Evaluate Audit Evidence Assess ____ of _____throughout the audit Evaluate _________ _______performed as substantive tests and at overall review stage Respond to misstatements Don’t forget the ___________ _________

16. Step 7—Communicate about Fraud Communicate –All fraud to ______________________ –All management fraud to _______ _______ –All material fraud to ____________and _________ __________ Determine if significant deficiencies or material weaknesses related to internal control have been identified; communicate them to management and the audit committee

17. Document Consideration of Fraud Document steps 1 -7 –Staff discussion –Information used to identify risk of fraud –Fraud risks identified –Assessed risks after considering programs and controls –Results of assessment of fraud risk –Evaluation of audit evidence –Communications requirements If improper revenue recognition was not considered a risk, why it wasn’t

18. Major Initiatives of SAS No. 99 Emphasis of the importance of professional ____________ The use of the fraud __________ as a way to understand the risk factors associated with fraud Emphasis of the importance of _________ of fraud among audit team members, with client personnel, and others. Expanded operational guidance on how to respond the increased risk of fraud—step # _____ Emphasis of the importance of considering ___________ ___________ fraud.