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(a) What is meant by the term "fraud"? Give four examples of fraudulent activities.

      

(a) What is meant by the term "fraud"? Give four examples of fraudulent activities.

(b) What do you consider to be the auditor?s responsibilities in the course of
the normal annual audit in relation to the detection of fraud?

(c) Explain the way in which the auditor should approach and perform his work in order to meet these responsibilities.

  

Answers


johnson
a) Fraud refers to the intentional misrepresentation of financial information by one or more individuals amongst management, employees and third parties.
Fraud involves: -
1. Manipulation, falsification or alteration of records or documents. For example where an employee alters the amount payable to a supplier as per the invoice with the objective of obtaining a financial gain.
2. Misappropriation of assets. For example where cash collections are misappropriated and the amount is not recorded.
3. Suppression/omission of the effects of transactions from records/documents. For example failure to recognise liabilities in the accounting records.
4. Recording and transactions without substance.
5. Misappropriation of acting policies.
6. Reporting to management where any frauds have been detected or suspected.
7. Providing recommendations through the management letter on ways of strengthening the system to minimise the potential frauds.

b) The primary responsibility for the prevention and detection of frauds and errors rests on management of the company.
Auditors should assess the risk that fraud/error may cause the financial status to contain material misstatements and should enquire of management as to any fraud or error that has been discovered based on that risk assessment, which will involve consideration of the integrity of the client, unusual pressures on the entity, unusual transactions and problems in obtaining sufficient appropriate evidence, the auditor should design appropriate tests.
Auditors accept representations and documents as genuine unless evidence to the contrary, appears but conduct their work with an attitude of professional scepticism.
An auditor should design audit procedures to obtain reasonable assurance that those frauds and errors, which are material, have not occurred or if they have occurred they have either been corrected or properly disclosed in the financial statements.
Due to the inherent limitations of an auditor, there is an unavoidable risk that some material misstatements will not be detected even though the audit is properly planned and performed. This is because fraudulent conduct is often deliberately concealed and all internal controls and audit procedures are subject to inherent limitations. Any accounting and internal control system has inherent limitations which means that it may be ineffective against frauds such as collusion between employees and management override of controls.
If the auditor detects any fraud regardless of the materiality he has a duty to report this to management.
c) The auditor should plan his work with a reasonable expectation of detecting any material frauds or errors. He should approach his work with an attitude of professional scepticism. He should be on the look out for any factors that increase the risk of fraud or error. Where fraud is suspected the auditor should carry out additional audit procedures as appropriate to dispel his suspicion.
Procedures where fraud or error is suspected: -
1. Consideration of potential effects: - If the auditor believes that the indicated fraud or error could have a material effect on the financial status, he should perform modified or additional procedures.
2. Modified or additional procedures: - This will depend on the nature of the fraud indicated the likelihood of its occurrence and the likely effect on the financial status where such audit procedures do not dispel the suspicion of fraud or error. The auditor should discuss the matter with management and consider if it has been properly reflected in the financial status.
3. Approaching his work with seasonal scepticism.
Implications for the audit
Where fraud is discovered the auditor should report this to management and also consider the implications on other evidence obtained from management. Where the fraud discovered is material the auditor should ensure that the effects are properly reflected in the financial statements. Auditors should consider the effect of the fraud or error on their preliminary risk assessment and on the reliability of management responsibility especially where senior management is involved.
johnson mwenjera answered the question on March 28, 2018 at 08:57


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