Fraud Incentives
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CPA Auditing and Attestation (AUD) › Fraud Incentives
The three conditions generally present when fraud occurs include:
motivation
avoidance
Internal Control
management oversight
Explanation
Motivation to commit fraud is typically one of the elements present when fraud occurs. Internal control is a system used to help prevent fraud. Management oversight is an element of internal control.
Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
Equipment is sold at a loss before being fully depreciated
Lack of turnover of employees in the accounting department
Management displays a significant disregard for regulations and authority
Monthly bank recs usually include several deposits in transit
Explanation
Fraudulent financial reporting includes the intentional misstatement or omission of amounts or disclosures in financial statements and are designed to deceive users of the financial statements. This reaction from management would indicate a higher risk of fraud than a management with public respect and diligence of regulations and authority. Of the remaining options, these are not necessarily indicative of fraud or a higher risk of fraud.
In the pursuit of maintaining professionally skeptical, an auditor should conduct all of the following procedures except:
Maintain discussion of fraud risk with engagement team
Demand compliance from management
Evaluate evidence from the audit about fraud
Obtain information to help identify fraud risks
Explanation
Professional skepticism encourages cordial and polite behavior while analyzing evidence and keeping an open mind for potential risks of fraud. Demanding compliance from management is not professionally skeptical.
Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
The inability of the company to generate cash flows from operations while reporting substantial earnings growth
Large amounts of liquid assets that are easily convertible into cash
Management's lack of interest in increasing the entity's stock trend
Inability to borrow necessary capital without granting debt covenants
Explanation
The CPA auditor's concern about fraud risk would be raised if the company was unable to generate cash flows while reporting earnings growth as these two factors are inconsistent.
According to AU 316; “Management has a unique ability to perpetrate fraud because”
They pick the auditors
They can override controls
They are not accountable to ownership
They are not responsible for internal control
Explanation
AU 316 indicates that management is in a unique position to be able to override internal controls. This is considered a control risk.
Managers and/or employees may attempt to conceal the fraud by:
blaming other employees
colluding with other employees
ignoring auditors
none of the above
Explanation
Audit collusion is a situation where two or more individuals work together to override a system of internal controls. Internal control systems are built around the concept of segregation of duties. Where collusion exists, segregation of duties is overridden.