Fraud
Management’s Responsibility
Auditor’s Consideration
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Management’s
Responsibility
To design and implement
programs and controls
that prevent, deter and/or detect
FRAUD
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Auditor’s
Consideration
When and how does the auditor
look for fraud indicators?
Statement on Auditing Standards Number 99
(Codification AU §316)
(Guidelines for Management)
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We will cover the auditor’s
considerations first
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Sets the tone for the audit
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Readily available guidelines
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Directs management’s behavior
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What is fraud?
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An intentional act that results in a
material misstatement in the financial
statements that are the subject of an
audit. (Note: Fraud is a legal concept;
auditors do not make legal
determinations.)
(Note: the auditor should plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement – intentional or unintentional.)
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Two types
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fraudulent financial reporting
misappropriation of assets
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What is fraud? (cont’d)
Fraudulent reporting may result from:
 a misstatement or omission of amounts or
disclosures designed to deceive FS users
because GAAP was not followed
 an indefensible interpretation of complex
accounting rules
 temporary misstatements expected to be
corrected later
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What is fraud? (cont’d)
Misappropriation of assets (theft or
defalcation) may involve a theft resulting
in non-GAAP, such as embezzling receipts,
stealing assets, causing payment for
goods or services not received
This section is only concerned with those
misappropriations that cause the FS not
to be fairly presented, in all material
resects, in conformity with GAAP
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What is fraud? (cont’d)
Conditions usually present when fraud
occurs:
 incentive or pressure
 opportunity due to weak controls
 ability to rationalize following
questionable ethical values
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What is fraud? (cont’d)
Other considerations:
 Management has a unique ability to
perpetuate fraud by overriding controls.
 Fraud may be concealed by withholding
evidence, misrepresenting information in
response to inquiries, or falsifying
documentation.
 Fraud may be concealed through
collusion.
 Some evidence may look like fraud when
in fact it results from unexpected or
unusual conditions.
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What is fraud? (cont’d)
Keys for school personnel and auditors:
 Consider where incentives and
opportunities for fraud exist
 Design controls to prevent or detect it.
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Audit engagement personnel
discussions re: fraud risk
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Engagement personnel should
“brainstorm”
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how and where FSs are susceptible to material
misstatement due to fraud
how management could perpetrate and conceal
fraudulent financial reporting
how assets could be misappropriated
Consider incentive, opportunity, and
environment (attitudes and rationalizations).
Communication about the possibility of
fraud should continue throughout the
audit. (Professional Skepticism)
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Obtaining info identifying risks of
material misstatement due to fraud
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Make inquiries of management and others
about their views of the risk of fraud and
how the risks are addressed.
Consider unusual or unexpected
relationships in performing analytical
procedures in planning the audit.
Consider the existence of one or more
fraud risk factors.
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Obtaining info re risks (cont’d) -Inquiries
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Inquiries of management about:
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knowledge of fraud or suspected fraud, allegations
of fraud, understanding of risks of fraud, anti-fraud
programs and controls, monitoring at campuses,
views on ethical behavior.
reports to the audit committee re fraud
Inquiries of the audit committee about
exercise of oversight in mitigation of fraud
risks
Inquiries of the internal audit personnel
about:
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views of the risk of fraud, procedures to detect
fraud, and management’s responses
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Obtaining info re risks (cont’d) -Inquiries
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Inquiries of others
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Federal programs coordinator, Special
education director, State comp ed director
Student attendance accounting personnel
PEIMS coordinator
Principals, campus secretaries, bookkeepers,
etc.
Transportation and plant maintenance
personnel
Legal counsel
Food service personnel
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Obtaining info re risks (cont’d) –
Analytical Procedures
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Consider using FEISTIER
Consider trends and interim
measurements
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enrollment
property values
employment in the area
AEIS scores
federal grants
Consider academic standing
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TAKS Scores
Dropout rate
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Obtaining info re risks (cont’d) –
Risk Factors and Other Information
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Incentive pressure
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Opportunity
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Administrative cost ratio
DIP/CIP
TAKS, Special Education, At Risk
85% rules
Goal congruency
Attitude/rationalizations
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Aggressive accounting interpretation
Interim measures or scores adjust
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Identifying risks that may result in
material misstatement due to fraud
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With each risk identified, consider:
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the type – i.e. fraudulent reporting vs.
misappropriation of assets
its significance – i.e. magnitude
the likelihood it will result in material
misstatement in the financial statements
whether it is pervasive or specifically related to
an account or type of transaction
Presume that improper revenue
recognition is a fraud risk
Consider the risk of management override
of controls
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Assessing risks in re evaluation of
entity’s programs and controls
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Understand the five components of
internal control of the client’s system.
Identify types of potential misstatements
and consider factors that affect the risk of
material misstatement.
Design tests of controls and substantive
tests.
Consider that controls can be
circumvented by collusion or
management override.
Evaluate whether client’s controls address
identified risks and are in operation.
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Responding to the results of the
assessment
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Are additional or different audit
procedures needed?
Is additional corroborating evidence
needed?
If additional procedures designed to
address the risks of material
misstatement due to fraud are not
practicable, consider withdrawing
from the engagement with
communication to appropriate
parties.
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Responding to the results of the
assessment (cont’d)
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Overall response to the risk of
material misstatement:
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assignment of personnel and
supervision (IT personnel, special
education consultants, etc.)
accounting principles (federal
programs, state funding, attendance
records, etc.)
predictability of auditing procedures
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Responding to the results of the
assessment (cont’d)
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Nature, timing, and extend of procedures
to address the identified risks from
fraudulent financial reporting
Additional examples of responses to
identified risks of misstatement
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revenue recognition tests
activity fund tests
inventory tests
administrative actions such as “at risk”
designations, ARD results, attendance
accounting
Risks for misappropriations of assets
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Responding to the results of the
assessment (cont’d)
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Consider the risk of management override
of controls
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regular entries, adjusting entries, consolidating
entries, closing entries
adjustments directly to the financial
statements
Controls over automated entries
Evaluate the rationale for significant
unusual transactions.
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Evaluating Audit Evidence
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Assessing risks of material misstatement
due to fraud throughout the audit
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discrepancies in accounting records
conflicting or missing evidential matter
problematic or unusual relationships between
the auditor and management
Evaluating whether analytical procedures
(substantive tests or overall review)
indicate previously unrecognized risk of
material misstatement due to fraud
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Evaluating Audit Evidence (cont’d)
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Evaluating risks at or near completion of
fieldwork
Responding to misstatements that may be
the result of fraud
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Not material – evaluate the implications,
especially those dealing with the organizational
position of those involved
Material – gather more evidence, extend the
engagement scope, suggest conference with
legal counsel
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Communicating about fraud to
mgmt, audit committee, and others
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Communicate findings to appropriate level
of management, even if inconsequential.
If senior management is involved, report
to the audit committee.
When the risks involve continuing
controls, consider whether they are
reportable conditions that should be
communicated to senior management and
the audit committee.
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Communicating about fraud to
mgmt, aud com, and others (cont’d)
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The auditor may report to parties
outside the school district when:
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related to compliance with certain legal
or regulatory requirements
to successor auditor
due to subpoena
required by a funding agency
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Documenting the auditor’s
consideration of fraud
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Documentation of discussion among engagement
personnel
Procedures performed to obtain information
necessary to identify and assess the risks of
material misstatement due to fraud
Specific risks identified
If improper recognition of revenue has not been
identified, support for the auditor’s conclusions
Considerations of management overrides
Reasons for additional procedures or other
responses
The nature of communications about fraud made
to management, the audit committee, and others
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Part of the Overall Audit Process
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Integrated in the planning and
supervision considerations
Considered when
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determining audit risk and setting
materiality thresholds
evaluating internal controls
Management’s responsibility
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Management’s
Responsibility
Considering the Potential for Fraud
Designing and Implementing
Programs and Controls
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Considering the Potential for Fraud
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Financial statement misstatements
Revenues – attendance, taxes, grants
 Expenses – supplies, payroll, consulting,
equipment, travel
 Fund balances – adjustments, evaluation
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Misappropriation of assets
Cash disbursements
 Cash receipts
 Equipment
 Reimbursements
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Designing/Implementing
Programs/Controls
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Control environment
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Risk assessment
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Ethics seminars
Other training
Special review of the auditor
Reviews by TEA
Control activities
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Organizational structure (segregation of
duties)
Performance reviews
Information processing
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Designing/Implementing
Programs/Controls
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Information and communication
Financial accounting system
 PEIMS
 Student accounting system
 Other systems
 Documentation
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Monitoring
Periodic management reviews
 Audit
 TEA reviews
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