The intent to deceive Misrepresentation in the financial statements of events, transaction or other significant information Fraud is ordinarily accompanied by acts specifically designed to conceal its existence and auditors do not make legal determinations of whether fraud has actually occurred Embezzling receipts, stealing physical assets or intellectual property , causing an entity to pay for goods and services not received, or using an entity’s assets for personal use Greater for management fraud because of management’s ability to override existing internal controls, which is always assumed in audit. Theft of assets The non recording of transactions When planning and performing audit procedures and evaluating and reporting the results thereof, the auditor should consider the risk of misstatements in the financial statements resulting from fraud. Review of corporate charter and bylaws Poor internal control Recording sales for inventory sold with the right to return, hence, fraud on revenue recognition is always presumed to exist in absence or conditions to the contrary. Use less predictable audit procedures. Transactions that are recorded in a complete or timely manner or are properly recorded as to amount, accounting period, classification, or entity policy Significant explained items on reconciliations. Complex sales transactions and transfers of funds between affiliated companies. At least one level above persons who appear to be involved with the misstatement or suspected fraud The chairman of audit committee It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity involving employees who have significant roles in internal control only. Procedures performed to obtain information necessary to identify and assess the risks of material fraud. Noncompliance includes personal misconduct of the entity’s management or employees though they are unrelated to the entity’s business activities Generally, the further removed non-compliance is from the events and transactions reflected in the financial statements, the more likely the auditor is to become aware of it or to recognize the possible non-compliance. This is because an illegal act by the client often relate to operating aspects rather than accounting aspects. The auditor shall document identified or suspected non-compliance with laws and regulations but not the results of discussion with management, and where applicable, those charged with governance and other parties outside the entity Authorized transactions or properly recorded transactions Evaluate the effect on the financial statements and may consider seeking legal advice especially when involving members of senior management, including members of the board of directors. The auditor’s responsibility for detecting directeffect illegal acts is similar to the responsibility to detect fraud. . Contact the local law enforcement officials regarding potential criminal wrongdoing. DIY The chief executive and chief financial officers It neither assumes that management is dishonest nor assumes unquestioned honesty. The company's management takes an overly aggressive approach to revenue recognition. modify procedures to actively search for the existence of fraud. Make a legal determination of whether fraud has occurred. By the assignment of qualified audit staff to risky areas of the engagement. Large numbers of debit entries and other adjustments made to accounts receivable records. Make inquiries of the client’s management and obtain an understanding of the circumstances underlying the acts and of other evidence to determine the effects of the acts on the financial statements. Assess the inherent risk of material misstatements due to illegal acts Management fails to take the appropriate remedial action and reliance on management’s representation becomes doubtful. Report the act to high-level personnel within the client's organization Are financial reporting operations controlled by and limited to one location? Management turnover is unusually high Usual delays by the entity in providing requested information Accounting policies that appear to be consistent with industry norms. Consider the materiality of the individual account balances for substantive testing The risk that management overrides controls. AS Population. Applying audit procedures to less than 100% of items within an account balance or class of transactions such that all sampling units have a chance of selection. Selecting the sample without following a structured technique. When testing controls that leave audit trail. Sampling risk can be reduced by increasing sample size Risk of assessing control risk too low and risk of incorrect acceptance affects audit effectiveness as it would usually lead to additional work to establish that initial conclusions were incorrect. Measure the sufficiency of the evidential matter obtained Drawing an erroneous conclusion from sample data A randomly chosen sample may not be representative of the population as a whole on the characteristic of interest. An advantage of using statistical sampling is that the cost/benefit ratio is always positive. Random sample Systematic selection Haphazard selection Block selection SAMPLING FOR ATTRIBUTES Attribute estimation sampling Leave an audit trail as evidence of compliance. Deviation rate Tolerable deviation rate The population size has little or no effect on sample size except for very small populations. Increase Increase Decrease Stop-or-go sampling. Inspecting employee time cards for proper approval by supervisors Initially concealed by a forged document. Treat the missing check as a deviation for the purpose of evaluating the sample The extent of reliance to be placed on the procedures. Discovery sampling Assessing control risk too low . Sample size Assess control risk at the maximum because the sample deviation rate plus the allowance for sampling risk exceeds the tolerable rate. More than the deviation rate in the auditor’s sample III. The deviation rate in the auditor’s sample is less than the tolerable rate, but the deviation rate in the population exceeds the tolerable rate. Does support the auditor’s planned assessed level of control risk when the true operating effectiveness of the control does not justify such an assessment. Does not support the auditor’s planned assessed level of control risk when the true operating effectiveness of the control justifies such an assessment. Higher than the expected rate of errors in the related accounting records. Has been properly voided Contains proportionately more deviations from prescribed control procedures than actually exist in the population as a whole Deviations in the population are within an acceptable range. Audit objective VARIABLE SAMPLING This is always true unless 100 percent of the population is tested. Variables sampling Predict a monetary population value within a range of precision. Reject the statistical hypothesis that a book value is not materially misstated when the true book value is materially misstated Find smaller misstatements. The beta error is of greater concern to the auditor than the alpha error Incorrect rejection. Incorrect acceptance. Effectiveness of the audit If differences between the book values and audit values of a population are rare. Inclusion of zero and negative balances generally does not require special design considerations. Probability proportionate to size sampling Systematic random sampling. Yes Yes Stratify the cash disbursements population so that the unusually large disbursements are selected. If the population has highly variable recorded amounts. Decrease sample size Increase sample size P6,000,000 P1,075,000 Recorded book value is not likely misstated by a material amount. P6,000 Management's explanations for why errors in the sample occurred. Precision.
