fraud & error
Summary
TLDRToday's discussion focuses on fraud and error, defining them as intentional deception and unintentional mistakes in financial statements. The Fraud Diamond Model explains why fraud occurs, citing pressure, opportunity, and rationalization as key factors. Management and auditors have crucial roles in preventing and detecting these issues through effective systems and professional skepticism. Auditors must report suspected fraud to management and, if significant, to regulatory authorities while maintaining confidentiality.
Takeaways
- 📚 **Definition of Fraud**: Fraud is the intentional act of deception to make someone believe something that isn't true, particularly in financial statements.
- 🔍 **Definition of Error**: Error is an unintentional mistake, such as mathematical mistakes or misapplication of consistent principles.
- 💼 **Types of Fraud**: There are two types of fraud - financial statement fraud and misappropriation of assets.
- 📊 **Financial Statement Fraud**: This involves manipulation, falsification, or alteration of reports, documents, or the omission of transactions.
- 💸 **Misappropriation of Assets**: This is the act of using assets for personal use, such as taking cash.
- 🚨 **Reasons for Fraud**: People commit fraud due to various motivations, often influenced by pressure, opportunity, and rationalization.
- 🛡️ **Management Responsibilities**: Management must take reasonable steps to prevent and detect fraud and error, including installing effective accounting and internal control systems.
- 👀 **Auditor Responsibilities**: Auditors are responsible for expressing an opinion on the truth and fairness of financial statements and identifying financial reporting triggers.
- 🔎 **Auditor's Role in Detecting Fraud**: Auditors should maintain professional skepticism and perform procedures to detect fraud.
- 🗣️ **Auditor's Reporting Responsibilities**: Auditors must communicate findings to management and, in cases of suspected fraud, even if immaterial, to regulatory authorities.
- 📖 **User of Auditor's Report**: The auditor's report is used to assess the financial statements' accuracy and the presence of material misstatements due to fraud or error.
Q & A
What is the definition of fraud according to the script?
-Fraud is an intentional act to make someone believe something that isn't true, often involving manipulation, falsification, or alteration of financial reports or documents.
What is the difference between fraud and error as described in the script?
-Fraud is intentional, while error is unintentional. Fraud involves deliberate actions to deceive, whereas error is a mistake or an unintentional misstatement in financial reporting.
What are the two types of fraud mentioned in the script?
-The two types of fraud mentioned are financial statement fraud and misappropriation of assets. Financial statement fraud involves manipulating financial reports, while misappropriation of assets is the theft or misuse of an organization's resources for personal gain.
What is the Fraud Diamond model and how does it relate to the motivation for committing fraud?
-The Fraud Diamond model is a framework developed by criminologists that suggests three conditions must be present for fraud to occur: pressure, opportunity, and rationalization. Pressure is often a motivator, opportunity provides the means, and rationalization allows the individual to justify their actions.
What are some examples of pressure that might lead someone to commit fraud?
-Examples of pressure include personal financial difficulties, addiction, or the illness of a family member, which might motivate someone to engage in fraudulent activities.
What is the role of management in preventing and detecting fraud and error?
-Management is responsible for taking reasonable steps to prevent and detect fraud and error. This includes installing effective accounting and internal control systems, appointing an Audit Committee, and establishing a code of conduct for employees and management.
What are the responsibilities of auditors in relation to fraud and error?
-Auditors are responsible for expressing an opinion on whether the financial statements are a true and fair view and have been prepared in accordance with applicable standards. They also identify financial reporting triggers and conduct audits to provide reasonable assurance that the financial statements are free from material misstatement due to fraud or error.
What should an auditor do if they suspect the existence of fraud?
-If an auditor suspects the existence of fraud, they should communicate their findings to management as soon as possible, even if the effect on the financial statements would be immaterial.
What is the significance of the auditor's report on the financial statements?
-The auditor's report provides an opinion on the financial statements and indicates whether they are free from material misstatement due to fraud or error. It is a critical component of financial reporting that helps users assess the credibility of the financial information presented.
What are the reporting responsibilities of auditors to regulatory and enforcement authorities?
-Auditors have a duty of confidentiality, but in certain circumstances, they may be required to report fraud or errors to regulatory and enforcement authorities. They should seek legal advice when faced with such situations to ensure compliance with the law.
How does the script define the term 'error' in the context of financial statements?
-In the context of financial statements, 'error' refers to unintentional mistakes or misstatements, such as mathematical inaccuracies or misapplications of accounting standards, which are not the result of deliberate actions to deceive.
Outlines
🔍 Understanding Fraud and Error
The script begins by introducing the topic of 'fraud and error'. It differentiates between fraud, which is an intentional act to deceive, and error, which is unintentional. Fraud is further explained as manipulation or falsification of financial records, while error is a misstatement due to mistakes. The video mentions the Fraud Triangle model, which suggests that fraud occurs when there is pressure, opportunity, and rationalization. Pressure could be personal or financial, opportunity arises from access to resources or systems, and rationalization is the justification individuals use to commit fraud. The responsibilities of management and auditors are also outlined, emphasizing the need for preventive measures and detection systems to combat fraud and error.
📜 Auditors' Reporting Responsibilities
This paragraph discusses the reporting responsibilities of auditors when they suspect fraud or error. Auditors are required to communicate their findings to management, even if the impact on financial statements is minimal. They must also consider the implications of their reports on the financial statements and whether the fraud or error is material. In cases where fraud or error is significant, auditors have a duty to report to regulatory authorities, but they must balance this with their duty of confidentiality. The script advises auditors to seek legal counsel when in doubt about reporting requirements.
Mindmap
Keywords
💡Fraud
💡Error
💡Intentional
💡Financial Statement Fraud
💡Misappropriation of Assets
💡Motivation
💡Opportunity
💡Rationalization
💡Management Responsibilities
💡Auditor Responsibilities
💡Professional Skepticism
💡Reporting Responsibilities
Highlights
Definition of fraud: intentional act to deceive, causing someone to believe something untrue.
Definition of error: unintentional mistakes in financial statements such as misstatements.
Fraud is intentional while error is not.
Types of fraud include financial statement fraud and misappropriation of assets.
Financial statement fraud involves manipulation or falsification of reports and documents.
Misappropriation of assets is the theft or misuse of an organization's resources for personal gain.
Motivations for fraud can vary but often include personal financial distress or addiction.
Opportunity plays a significant role in the commission of fraud, often due to access to company data or budgets.
Rationalization is a key factor where individuals justify their fraudulent actions.
Management's responsibilities include preventing and detecting fraud and error within the company.
Auditors are responsible for expressing an opinion on the true and fair view of financial statements.
Audits are designed to provide reasonable assurance that financial statements are free from material misstatement due to fraud or error.
Auditors must maintain professional skepticism throughout the audit process.
Auditors have reporting responsibilities, including communicating findings of suspected fraud to management.
The auditor's report should exclude fraud or error that has a material effect on the financial statements.
Auditors have a duty of confidentiality but may be required to report fraud or errors to regulatory authorities.
The importance of legal advice for auditors regarding the reporting of fraud or errors.
Transcripts
hello everyone our topic for today is
fraud and error now before we start
let's I want to give you some idea of
what is fraud and error
now this is a little odd and this is a
destitute
okay for auditor one she make sectional
eggs to make someone believe of
something that isn't true
while auditor - she makes an intention
of the state in financial statements
such as mathematical state list into
prescription effect and misapplication
of a consistent now to tweet me - which
one is fraught in the twenties error so
to give you some hints auditor watch
which is intentional egg now that's
referred to fraud while are the two are
intentional a it's referred to an error
[Music]
now we move to the types of drop and
there are two types of boats which which
are financial statement prod and
misappropriation of ethics for financial
statement rod it is the manipulation
falsification or alteration of report s
document and the omission of transaction
for example the BOSU is not disclosed in
a lot of financial center while he is a
profession of Advent it is using own and
get access for personal use for example
sitting at bat and that wing of cash
with E and anymore
[Music]
why people commit fraud while we do
motivation may differ from case to case
our front diamond model developed by
criminologists normal pleasure show
three conditions that make frost Magnum
it is pleasure opportunity and
rationalization for the first one
pressure it is often what motivates
someone to engage in fraud we give one
it could be personal death and addiction
an illness of the family member for the
second one is opportunity many people
involve the public and private sector
have access to tools that enables them
to commit into fearful for example
internal company data or control over
the budget and then the combination of
pressure and being exposed to touch of
the TV on the daily basis can create a
strong sensation but even with these two
elements most rocks still require
rationalization many processors our
first high offender so in order to
commit an egg most will regard and wrong
they need to just provide the staff and
some feel entitled to the money because
they are underpaid or followers
[Music]
so now we move the responsibilities of
management and auditors in relation to
fraud and error for management they have
to take reasonable steps to prevent and
detect fraud and error within the
company but how did it by installing and
effective accounting system installing
an effective internal cultural system
appointing Audit Committee and
establishing and implementing code of
conduct among employees and management
for others they have to express an
opinion as to whether the financial
statements are true and fair view and
have been prepared in accordance with
and identify financial reporting trigger
an audit conducted in accordance with
the Malaysian approve auditing standards
is designed to provide reasonable
assurance that the financial statements
are free from material misstatement
caused by the fraud or error and the
auditor should maintain an attitude of
professional skepticism throughout the
audit
except or identify the factors related
to property 1 & 2 for procedures to
detect fraud last but not least the
auditor has reporting responsibilities
to earth we management which the auditor
should communicate factual findings to
management as soon as the article
suspect fraud may exist even if the
effect of the financial statement would
be immaterial and the actual fraud or
significant error for the next one is
user of the auditors report on the
financial staff the auditors exclude the
fraud or error test material effect and
not totally for excess to the financial
sector last closely to the regulatory
and enforcement authorities
the auditors duty of confidentiality to
ordinary recruit reporting fraud or
errors the third party however in 1615
stances a duty of confidentiality
authorized by law or by court auditors
should get legal advice on this sector
you
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