Audit Snapshot: Fraud Error Noncompliance

Summary

This video discusses the complexities of fraud, error, and non-compliance in financial statement audits. It differentiates between fraud and error based on intent, emphasizing the auditor's role in detecting material misstatements while noting that prevention is primarily management's responsibility. The video also outlines the fraud triangle, consisting of pressure, opportunity, and rationalization, which contributes to fraudulent activities. Additionally, it addresses the implications of non-compliance with laws and regulations, detailing the auditor's responsibilities in identifying and responding to these risks. Overall, the content serves as a valuable guide for understanding audit practices related to fraud and compliance.

Takeaways

• 😀 The primary objective of an FS audit is to express an opinion on whether financial statements are free from material misstatements.
• 🤔 Misstatements can arise from fraud, error, or non-compliance, with fraud characterized by intentional wrongdoing.
• 🔍 Distinguishing between fraud and error can be complex in practice, often requiring professional skepticism from auditors.
• 📈 Management is ultimately responsible for identifying, preventing, and detecting fraud, error, and non-compliance.
• ⚖️ The auditor's role focuses on obtaining reasonable assurance that financial statements are free from material misstatements due to fraud or error.
• 💰 There are two types of fraud relevant to FS audits: fraudulent financial reporting (window dressing) and misappropriation of assets.
• 🔺 The fraud triangle includes pressure, opportunity, and rationalization, which are key factors in the likelihood of fraud occurring.
• 📑 In a risk-based audit approach, auditors must document their assessment of risks, especially concerning revenue recognition.
• 📢 Auditors are responsible for reporting instances of suspected fraud or non-compliance to appropriate levels of management or governance.
• 📝 For non-compliance, the auditor evaluates the impact on financial statements, with responsibilities differing based on whether the illegal acts have direct or indirect effects.

Q & A

What is the primary objective of a financial statement (FS) audit?

The primary objective of an FS audit is to express an opinion as to whether the financial statements are free from material misstatements.

How are fraud and error differentiated in the context of financial statements?

Fraud is characterized by intentional actions, while error refers to unintentional mistakes. However, in practice, determining intent can be complex.

What role does management play in preventing fraud, error, and non-compliance?

Management and those charged with governance are ultimately responsible for identifying, preventing, and detecting fraud, error, and non-compliance.

What types of fraud are identified in the context of FS audits?

The two types of fraud are fraudulent financial reporting (often referred to as window dressing) and misappropriation of assets, which involves theft or embezzlement.

What is the fraud triangle and what does it consist of?

The fraud triangle consists of three elements: pressure (incentives to commit fraud), opportunity (lack of strong controls), and attitude or rationalization (justifications for committing fraud).

What responsibilities does an auditor have regarding non-compliance?

Auditors must obtain a general understanding of the legal and regulatory framework, assess the risk of material misstatement due to non-compliance, and determine the nature of any identified non-compliance.

How does an auditor respond if they identify a direct effect illegal act?

If an illegal act has a direct effect on financial statements, the auditor is responsible for obtaining sufficient and appropriate evidence, which may include inquiries with management and document reviews.

What should an auditor do if they suspect non-compliance with laws or regulations?

The auditor should determine the nature of the suspected non-compliance, discuss it with management, and evaluate its potential effects on the financial statements.

What is the significance of professional skepticism in auditing?

Professional skepticism is crucial as it helps auditors remain alert to conditions that may indicate possible misstatements due to fraud or error, requiring them to exercise judgment in their evaluations.

What documentation is required from management regarding fraud and non-compliance?

Management is required to provide written representations concerning fraud and non-compliance, which the auditor evaluates to assess any impact on the audit opinion.