fraud & error

Summary

Today'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.