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.

Outlines

00:00

🔍 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.

05:01

📜 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.

Keywords

💡Fraud

Fraud is a deliberate act of deception to secure unfair or unlawful gain, often involving the manipulation of information or assets. In the context of the video, fraud is discussed as an intentional act that distorts financial statements or misappropriates assets. The script mentions that auditors must be vigilant for fraud, which can include falsification of reports or the omission of transactions, such as not disclosing bonuses (BOSU) in financial centers.

💡Error

An error refers to an unintentional mistake or inaccuracy that occurs during the process of preparing financial statements. Unlike fraud, errors are not deliberate and often stem from carelessness or misunderstandings. The video script distinguishes between fraud and error, emphasizing that auditors must be aware of both to ensure the accuracy of financial reporting.

💡Intentional

Intentional actions are those that are deliberate and purposeful. The video script uses the term 'intentional' to describe the actions of someone committing fraud, as opposed to errors which are unintentional. It highlights the importance of understanding the difference between intentional fraud and unintentional errors when auditing financial statements.

💡Financial Statement Fraud

Financial statement fraud involves the manipulation, falsification, or alteration of financial reports, documents, or the omission of transactions to misrepresent a company's financial health. The script explains that this type of fraud can include not disclosing bonuses or other financial details, which is a form of financial statement fraud.

💡Misappropriation of Assets

Misappropriation of assets refers to the theft or misuse of an organization's resources for personal gain. The video script mentions this as a type of fraud where individuals use their position to access and exploit company assets for their own benefit, such as taking cash from the company.

💡Motivation

Motivation in the context of the video refers to the driving forces behind why individuals commit fraud. The script discusses the Fraud Diamond model, which suggests that three conditions—pressure, opportunity, and rationalization—motivate individuals to commit fraud. For example, personal financial stress or addiction could be a pressure that motivates someone to engage in fraudulent activities.

💡Opportunity

Opportunity, as discussed in the script, refers to the circumstances that allow an individual the chance to commit fraud. This could include having access to sensitive company data or control over budgets. The video emphasizes that the presence of opportunity, combined with pressure, can lead to fraud.

💡Rationalization

Rationalization is the process by which individuals justify their wrongful actions to themselves. In the context of the video, rationalization is one of the conditions of the Fraud Diamond model that allows individuals to convince themselves that committing fraud is acceptable. For instance, someone might rationalize embezzlement by feeling entitled to the money because they are underpaid.

💡Management Responsibilities

Management responsibilities in relation to fraud and error involve taking reasonable steps to prevent and detect these issues within a company. The video script outlines that management should install effective accounting and internal control systems, appoint an Audit Committee, and establish a code of conduct to mitigate the risk of fraud and error.

💡Auditor Responsibilities

Auditor responsibilities include expressing an opinion on whether the financial statements present a true and fair view and are free from material misstatement due to fraud or error. The script mentions that auditors should maintain professional skepticism, identify financial reporting triggers, and conduct audits in accordance with approved auditing standards.

💡Professional Skepticism

Professional skepticism is the attitude that auditors must maintain throughout the audit process to critically assess evidence and information. The video script stresses the importance of this mindset for auditors to effectively detect fraud. It involves questioning and verifying information, rather than accepting it at face value.

💡Reporting Responsibilities

Reporting responsibilities refer to the duties of auditors to communicate their findings to management and, in some cases, regulatory authorities. The script explains that auditors must report suspected fraud to management, even if the financial impact is immaterial, and for significant errors or fraud, they may also need to report to regulatory authorities while balancing confidentiality requirements.

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

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