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Fraud Management s Responsibility Auditor s Consideration Management s Responsibility To design and implement programs and controls that prevent, deter and/or ... – PowerPoint PPT presentation

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Title: Fraud

  • Managements Responsibility
  • Auditors Consideration

Managements Responsibility
  • To design and implement
  • programs and controls
  • that prevent, deter and/or detectFRAUD

  • When and how does the auditor
  • look for fraud indicators?
  • Statement on Auditing Standards Number 99
  • (Codification AU 316)
  • (Guidelines for Management)

We will cover the auditors considerations first
  • Sets the tone for the audit
  • Readily available guidelines
  • Directs managements behavior

What is fraud?
  • 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
  • (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
  • Two types
  • fraudulent financial reporting
  • misappropriation of assets

What is fraud? (contd)
  • 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

What is fraud? (contd)
  • 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

What is fraud? (contd)
  • Conditions usually present when fraud occurs
  • incentive or pressure
  • opportunity due to weak controls
  • ability to rationalize following questionable
    ethical values

What is fraud? (contd)
  • 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.

What is fraud? (contd)
  • Keys for school personnel and auditors
  • Consider where incentives and opportunities for
    fraud exist
  • Design controls to prevent or detect it.

Audit engagement personnel discussions re fraud
  • Engagement personnel should brainstorm
  • 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 rationaliza-tions).
  • Communication about the possibility of fraud
    should continue throughout the audit.
    (Professional Skepticism)

Obtaining info identifying risks of material
misstatement due to fraud
  • 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
  • Consider the existence of one or more fraud risk

Obtaining info re risks (contd) -- Inquiries
  • Inquiries of management about
  • 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
  • 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
  • views of the risk of fraud, procedures to detect
    fraud, and managements responses

Obtaining info re risks (contd) -- Inquiries
  • Inquiries of others
  • 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

Obtaining info re risks (contd) Analytical
  • Consider using FEISTIER
  • Consider trends and interim measurements
  • enrollment
  • property values
  • employment in the area
  • AEIS scores
  • federal grants
  • Consider academic standing
  • TAKS Scores
  • Dropout rate

Obtaining info re risks (contd) Risk Factors
and Other Information
  • Incentive pressure
  • Administrative cost ratio
  • TAKS, Special Education, At Risk
  • 85 rules
  • Opportunity
  • Goal congruency
  • Attitude/rationalizations
  • Aggressive accounting interpretation
  • Interim measures or scores adjust

Identifying risks that may result in material
misstatement due to fraud
  • With each risk identified, consider
  • 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

Assessing risks in re evaluation of entitys
programs and controls
  • Understand the five components of internal
    control of the clients system.
  • Identify types of potential misstatements and
    consider factors that affect the risk of material
  • Design tests of controls and substantive tests.
  • Consider that controls can be circumvented by
    collusion or management override.
  • Evaluate whether clients controls address
    identified risks and are in operation.

Responding to the results of the assessment
  • Are additional or different audit procedures
  • 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

Responding to the results of the assessment
  • Overall response to the risk of material
  • assignment of personnel and supervision (IT
    personnel, special education consultants, etc.)
  • accounting principles (federal programs, state
    funding, attendance records, etc.)
  • predictability of auditing procedures

Responding to the results of the assessment
  • Nature, timing, and extend of procedures to
    address the identified risks from fraudulent
    financial reporting
  • Additional examples of responses to identified
    risks of misstatement
  • revenue recognition tests
  • activity fund tests
  • inventory tests
  • administrative actions such as at risk
    designations, ARD results, attendance accounting
  • Risks for misappropriations of assets

Responding to the results of the assessment
  • Consider the risk of management override of
  • regular entries, adjusting entries, consolidating
    entries, closing entries
  • adjustments directly to the financial statements
  • Controls over automated entries
  • Evaluate the rationale for significant unusual

Evaluating Audit Evidence
  • Assessing risks of material misstatement due to
    fraud throughout the audit
  • 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

Evaluating Audit Evidence (contd)
  • Evaluating risks at or near completion of
  • Responding to misstatements that may be the
    result of fraud
  • 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

Communicating about fraud to mgmt, audit
committee, and others
  • 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.

Communicating about fraud to mgmt, aud com, and
others (contd)
  • The auditor may report to parties outside the
    school district when
  • related to compliance with certain legal or
    regulatory requirements
  • to successor auditor
  • due to subpoena
  • required by a funding agency

Documenting the auditors consideration of fraud
  • Documentation of discussion among engagement
  • 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 auditors conclusions
  • Considerations of management overrides
  • Reasons for additional procedures or other
  • The nature of communications about fraud made to
    management, the audit committee, and others

Part of the Overall Audit Process
  • Integrated in the planning and supervision
  • Considered when
  • determining audit risk and setting materiality
  • evaluating internal controls
  • Managements responsibility

Managements Responsibility
  • Considering the Potential for Fraud
  • Designing and Implementing
  • Programs and Controls

Considering the Potential for Fraud
  • Financial statement misstatements
  • Revenues attendance, taxes, grants
  • Expenses supplies, payroll, consulting,
    equipment, travel
  • Fund balances adjustments, evaluation
  • Misappropriation of assets
  • Cash disbursements
  • Cash receipts
  • Equipment
  • Reimbursements

  • Control environment
  • Ethics seminars
  • Other training
  • Risk assessment
  • Special review of the auditor
  • Reviews by TEA
  • Control activities
  • Organizational structure (segregation of duties)
  • Performance reviews
  • Information processing

  • Information and communication
  • Financial accounting system
  • Student accounting system
  • Other systems
  • Documentation
  • Monitoring
  • Periodic management reviews
  • Audit
  • TEA reviews