Professional Documents
Culture Documents
13 Fraud Risk Assessment
13 Fraud Risk Assessment
i) How and where the entity’s financial statements may be susceptible to material misstatement
due to fraud, how management could perpetrate and conceal fraudulent financial reporting,
and how assets of the entity could be misappropriated.
ii) Circumstances that might be indicative of aggressive earnings management that could lead to
fraudulent financial reporting.
iii) The known external and internal factors affecting the entity that may create an incentive or
pressure for management or others to commit fraud, provide the opportunity for fraud to be
perpetrated, and indicate a culture or environment that enables management or others to
rationalize committing fraud.
iv) Management’s oversight of employees with access to cash or other assets susceptible to
misappropriation.
vi) How an element of unpredictability will be incorporated into the nature, timing and extent of
the audit procedures to be performed.
vii) The audit procedures that might be selected to respond to the susceptibility of the entity’s
financial statement to material misstatement due to fraud and whether certain types of audit
procedures are more effective than others.
viii) Any allegations of fraud that have come to the auditor’s attention.
i) Whether there are subsidiary locations, business segments, types of transactions, account
balances or financial statement categories where the possibility of error may be high, or
where fraud risk factors may exist, and how they are being addressed by management.
Whether those charged with the governance or management have knowledge of any
actual, suspected or alleged fraud.
ii) How those charged with the governance exercise oversight of management’s processes
for identifying and responding to the risks of fraud in the entity and the internal control
that management has established to mitigate these risks.
iii) The work of the entity’s internal audit function and whether internal audit has identified
actual, suspected or alleged fraud or any material weaknesses in the system of internal
control.
iv) How management communicates to employees its view on responsible business practices
and ethical behavior, such as through ethics policies or codes of conduct.
If the entity has established a programme that includes steps to prevent and detect fraud,
we enquire of those persons overseeing such programs as to whether the program has
identified fraud risk factors.
The entity has established an internal audit function which regularly evaluates the operating
effectiveness of internal controls in order to identify the risk of fraud (i.e misappropriation of
assets and fraudulent financial reporting.) Further, there is proper segregation of duties and
individuals are accounted for their responsibilities. Therefore, management’s fraud risk
assessment is low.
After enquiries of management, we come to know that accounting and internal control system
have been in place to prevent, detect and correct the risk of material misstatement due to fraud
and error. The presence and working of an internal audit function also corroborates the
management responses to the enquiries.
Management asserts that they are unaware of any known, alleged or suspected fraud. As internal
controls are operating effectively to prevent, detect and correct material misstatement due to
fraud and error, therefore, no such error or fraud were discovered during the year.
No significant matter comes to our knowledge after through enquiries and discussion with the
management which should be communicated to those charged with governance.
Fraud risk factors relating to fraudulent financial reporting may be grouped as follows:
New regulatory etc. requirements, which may impair entity's stability or performance
Increasing competition and market saturation and declining margins/ customer demands
Declining industry with increasing business failures
Rapid changes in industry like rapidly changing technology / rapid product obsolescence
There were no fraud risk factors identified during our understanding of the business, enquiries
of management and audit team discussion that may indicate the possibility of fraudulent
financial reporting.
Response
Response
Professional skepticism:
Despite the fact that there were no fraud risk factors identified, audit team shall maintain
professional skepticism throughout the audit to address the risk that fraud risk factors may exist.
Senior audit team members will be assigned high risky areas and junior audit team members
will be responsible for low and moderate risk areas to conduct audit effectively and efficiently.
Audit team members will ensure that significant accounting policies and principles are applied
consistently.
(b) Consideration at the account balance, class of transaction and assertion level
Specific responses to the auditor's assessment of the risk of fraud will depend upon the
types or combinations of fraud risk factors or conditions identified, and the account
balance, class of transaction and assertion may affect.
Revenue recognition
Revenue is recognized according to IFRS 15. We shall perform test of controls and test of
details to ensure effective operations of internal controls established by the entity.
Inventory quantities
At the year end, we attended the physical inventory count and obtained evidence about the
quantity and condition of inventory items. We also ensured that management’ s instructions to
count teams were being followed at inventory count.
No such non standard journal entries were identified during the audit.
We have not identified any significant activity that might indicate risk of material misstatement
due to fraud.
Differing circumstances would necessarily dictate different responses. Document the specific
responses.
Document circumstances that we have encountered that may indicate that there is a
material misstatement in the financial statements resulting from fraud or error. Consider
the example circumstances in ISA 240, Appendix 3.
We have not encountered any such circumstances that may indicate that there is a material
misstatement in the financial statement due to fraud or error.
Examples:
Document the additional audit procedures performed as a result of the circumstances noted
above.
If the auditor identifies a misstatement, the auditor shall evaluate whether such a
misstatement is indicative of fraud. If there is such an indication, the auditor shall
evaluate the implications of the misstatement in relation to other aspects of the audit,
particularly the reliability of management representations, recognizing that an instance of
fraud is unlikely to be an isolated occurrence.
If the auditor identifies a misstatement, whether material or not, and the auditor has
reason to believe that it is or may be the result of fraud and that management (in
particular, senior management) is involved, the auditor shall re-evaluate the assessment
of the risks of material misstatement due to fraud and its resulting impact on the nature,
timing and extent of audit procedures to respond to the assessed risks. The auditor shall
also consider whether circumstances or conditions indicate possible collusion involving
employees, management or third parties when reconsidering the reliability of evidence
previously obtained.
If the auditor confirms that, or is unable to conclude whether, the financial statements are
materially misstated as a result of fraud the auditor shall evaluate the implications for the
audit.
Results of Evaluation
If the auditor has identified a fraud or has obtained information that indicates that a fraud
may exist, the auditor shall communicate these matters on a timely basis to the
appropriate level of management in order to inform those with primary responsibility for
the prevention and detection of fraud of matters relevant to their responsibilities.
Unless all of those charged with governance are involved in managing the entity, if the auditor
has identified or suspects fraud involving:
(a) management;
(c) others where the fraud results in a material misstatement in the financial statements, the auditor
shall communicate these matters to those charged with governance on a timely basis. If the
auditor suspects fraud involving management, the auditor shall communicate these suspicions
to those charged with governance and discuss with them the nature, timing and extent of audit
procedures necessary to complete the audit.
(a) It acknowledges its responsibility for the design, implementation and maintenance of internal
control to prevent and detect fraud;
(b) It has disclosed to the auditor the results of its assessment of the risk that the financial
statements may be materially misstated as a result of fraud;
(c) It has disclosed to the auditor its knowledge of fraud or suspected fraud affecting the entity
involving:
(i) Management;
(iii) Others where the fraud could have a material effect on the financial statements; and
(d) It has disclosed to the auditor its knowledge of any allegations of fraud, or suspected fraud,
affecting the entity’s financial statements communicated by employees, former employees,
analysts, regulators or others.