Analyzing Audit And Fraud Risks

Appendix A.2 also lists several factors that could provide opportunities for management/employees to commit fraud. One factor that could lead to fraud is if, “There is ineffective monitoring of management as a result of: domination of management by a single person or small group without compensating controls.” The auditors should have taken notice of the lack of controls and segregation of duties with respect to Phar-Mor’s

Audit Risk Assessment can be done by this Audit Risk Model. This model consists of 3 types of risks i.e., inherent risk, control risk and detection risk. Eventually, audit risk is a product of these 3 types of risks (Griffiths, 2012).

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.”

Cases of fraud have been increasing over the years, and different agencies and authorities that have the task of subduing fraud have to get involved and put a stop to it. In the instance of which fraud has been uncovered, it is crucial to be aware of the red flags that were present in relation to fraud and associate them to the factors related to the fraud risk assessment. As Troy Gillard states in the Rd news magazine, a man that broke free after being acknowledged as suspicious when he wanted to take a loan out at the Cash Canada using a stolen ID amongst other official documents that had been stolen. It seemed that the ID and the other documents

2 Managing fraud risk: The audit committee perspective Fraud in a fi nancial statement audit

Audit risk is the risk that the auditor gives the wrong opinion – this can either be stating errors when there are none or when there are errors stating that there are none. This risk cannot be eliminated as auditors can only provide a reasonable assurance and not absolute, but instead this can only be managed and reduced to a minimum.

CAS 300 requires auditors to their audit using a risk based model where the nature, timing and extent of audit procedures are based on the assessed risk of material misstatement. Pickett (2006) argues that for audits to be effective and efficient, much of the audit effort should be focused on areas that are considered to pose the highest audit risk. Additional audit procedures should be linked to individual audit assertions whereas other audit procedures need to be performed as and when needed. Thus, for an audit plan to be put in place, it is necessary for an auditor to come up with a risk profile of the client comprising an understanding of the business operating by the audit client, assess business risk and also perform its preliminary analytical review.

Ann Inc. has a seven member Board that serves the interest of Ann Inc. and its investors. Four of the seven members of the Board of Directors would be considered to be Independent Members by the SEC rules. Five of the presiding members are listed:

The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident

bebe target is a hip, sexy, sophisticated, body-conscious woman who takes pride in her appearance (bebe, 2010).

• Directing appropriate attention to the different areas of the audit such as assessing materiality, so that when the detailed audit plan is prepared, audit procedures can be directed towards the material amounts.

Auditors will enter a much expanded arena of procedures to detect fraud as they implement SAS no. 99. The new standard aims to have the auditor’s consideration of fraud seamlessly blended into the audit process and continually updated until the audit’s completion. SAS no. 99 describes a process in which the auditor gather information needed to identify risks of material misstatement due to fraud, assesses these risks after taking into account an evaluation of the entity’s programs and controls and responds to the results. Under SAS no. 99, you will gather and consider much more information to assess fraud risks, than you have in the past (Ramos, 2003).

Rittenburg, Larry. Johnstone, Karla. Gramling, Audrey. (2012) Auditing: A Business Risk Approach 8e. Mason: South-Western, Cengage Learning.

Current economic conditions and other internal factors may raise the inherent risks for a particular account. Some transactions that are routine, noncomplex, and systematically processed may have lower inherent risks, while other routine transactions, such as cash transactions, are more susceptible to fraud and, therefore, have greater inherent risk (Clark 2009). Detection risk is the risk that substantive procedures may be ineffective in detecting errors. As your risk of material misstatement increases, an auditor must prepare an audit plan with more effective substantive procedure. By multiplying these risks together you arrive at the audit risk; defined by SAS 107, "Audit Risk and Materiality in Conducting an Audit," as the positive opinion of an auditor of financial statements that are materially misstated and unknowingly failed to be appropriately modified. As stated earlier, audit risks can never be fully eliminated. Normally, the formula is used to solve for detection risk after establishing an acceptable audit risk (usually 5-10%) based on factors surrounding the company, industry, and background of the client. The determination of detection risks ultimately plays a major role in planning the audit and establishing a materiality threshold. The audit opinion is directly influenced by the amount and type of audit evidence