KHALID AZIZ Fraud Auditing

KHALID AZIZ JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

KHALID AZIZ Learning Objective 1 Define fraud and distinguish between fraudulent financial reporting and misappropriation of assets.

KHALID AZIZ Types of Fraud Fraudulent financial reporting Misappropriation of assets

KHALID AZIZ Learning Objective 2 Describe the fraud triangle and identify conditions for fraud.

KHALID AZIZ The Fraud Triangle Incentives/Pressures OpportunitiesAttitudes/Rationalization

KHALID AZIZ Examples of Risks Factors for Fraudulent Reporting Financial stability or profitability is threatened by economic, industry, or entity operating conditions. Excessive pressure exists for management to meet debt requirements. Personal net worth is materially threatened.

KHALID AZIZ Examples of Risks Factors for Fraudulent Reporting There are significant accounting estimates that are difficult to verify. There is ineffective oversight over financial reporting. High turnover or ineffective accounting internal audit, or information technology staff exists.

KHALID AZIZ Examples of Risks Factors for Fraudulent Reporting Inappropriate or inefficient communication and support of the entity’s values is evident. A history of violations of laws is known. Management has a practice of making overly aggressive or unrealistic forecasts.

KHALID AZIZ Examples of Risks Factors for Misappropriation of Assets Personal financial obligations create pressure to misappropriate assets. Adverse relationships between management and employees motivate employees to misappropriate assets.

KHALID AZIZ Examples of Risks Factors for Misappropriation of Assets There is a presence of large amounts of cash on hand or inventory items. There is an inadequate internal control over assets.

KHALID AZIZ Examples of Risks Factors for Misappropriation of Assets Disregard for the need to monitor or reduce risk of misappropriating assets exists. There is a disregard for internal controls.

KHALID AZIZ Learning Objective 3 Understand the auditor’s responsibility for assessing the risk of fraud and detecting material misstatements due to fraud.

KHALID AZIZ Assessing the Risk of Fraud SAS 99 provides guidance to auditors in assessing the risk of fraud.

KHALID AZIZ Professional Skepticism SAS 1 states that, in exercising professional skepticism, an auditor “neither assumes that management is dishonest nor assumes unquestioned honesty.”

KHALID AZIZ JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.

KHALID AZIZ Sources of Information Gathered to Assess Fraud Risks Communication among audit team Inquiries of managementRiskfactorsAnalyticalproceduresOtherinformation Identified risks of material misstatements due to fraud

KHALID AZIZ Documenting Fraud Assessment Discussion Specific risks Procedures Reasons Results Other conditions Nature of communications

KHALID AZIZ Learning Objective 4 Identify corporate governance and other control environment factors that reduce fraud risks.

KHALID AZIZ Corporate Governance Oversight to Reduce Fraud Risks 1. Create and maintain a culture of honesty and high ethics. and high ethics. 2. Evaluate fraud risks and implement programs and controls to mitigate identified fraud risks. and controls to mitigate identified fraud risks. 3. Develop an appropriate fraud oversight process.

KHALID AZIZ Example Elements for a Code of Conduct Organizational code of conduct General employee conduct Conflicts of interest Outside activities, employment, and directorships

KHALID AZIZ Example Elements for a Code of Conduct Relationships with clients and suppliers Gifts, entertainment, and favors Kickbacks and secret commissions Organization funds and other assets

KHALID AZIZ Example Elements for a Code of Conduct Organization records and communications Dealing with outside people and organizations Prompt communications Privacy and confidentiality

KHALID AZIZ Organizational Factors Contributing to Risk of Fraud Collusion between employees and third parties Inadequateinternalcontrols Management override of internal controls

KHALID AZIZ Organizational Factors Contributing to Risk of Fraud Collusion between employees and management Lack of control over management be directors Ineffective or nonexistent ethics or compliance program

KHALID AZIZ Learning Objective 5 Develop responses to identified fraud risks.

KHALID AZIZ Responding to the Risk of Fraud Change the overall conduct of the audit to respond to identified fraud risks. Design and perform audit procedures to address identified risks. Design and perform procedures to address the risk of management override of controls.

KHALID AZIZ Learning Objective 6 Recognize specific fraud risk areas and develop procedures to detect fraud.

KHALID AZIZ Rates of Fraud Occurrence Theft of assets 4922 Check fraud Expense account abuse36 13 Credit card fraud Payroll fraud 12 3

KHALID AZIZ Rates of Fraud Occurrence Conflict of interest 12 9 Inventory theft Kickbacks 9 6 Financial reporting fraud 7 3

KHALID AZIZ Specific Fraud Risk Areas Inventory fraud risks Revenue and accounts receivable fraud risks Purchases and accounts payable fraud risks Other areas of fraud risk

KHALID AZIZ Learning Objective 7 Understand interview techniques and other activities after fraud is suspected.

KHALID AZIZ Methods of Uncovering Fraud Internal controls Internal audit Notification by employee 77%51% 52% 65% 43% 47% 63% 58% 51%

KHALID AZIZ Methods of Uncovering Fraud Accident Anonymous tip Notification by customer 54% 37% 28% 41% 35% 26% 34% 41% 34%

KHALID AZIZ Methods of Uncovering Fraud Notification by regulatory or law enforcement agency Notification by vendor External audit 19% 16% 8% 8% 16% 11% 15% 12% 4% 4% 5% 5%

KHALID AZIZ Responding to Misstatements that May be the Result of Fraud When fraud is suspected, the auditor gathers additional information to determine whether fraud actually exists.

KHALID AZIZ Types of Inquiry Techniques Informational inquiry Assessment inquiry Interrogative inquiry

KHALID AZIZ Types of Inquiry Techniques Evaluating responses Listening techniques Observing behavioral cues

KHALID AZIZ JOIN KHALID AZIZ ECONOMICS OF ICMAP, ICAP, MA-ECONOMICS, B.COM. FINANCIAL ACCOUNTING OF ICMAP STAGE 1,3,4 ICAP MODULE B, B.COM, BBA, MBA & PIPFA. COST ACCOUNTING OF ICMAP STAGE 2,3 ICAP MODULE D, BBA, MBA & PIPFA. CONTACT: R-1173,ALNOOR SOCIETY, BLOCK 19,F.B.AREA, KARACHI, PAKISTAN.