3-29 Management fraud (e.g., fraudulent fi nancial reporting) is a relatively ra

Question

3-29 Management fraud (e.g., fraudulent fi nancial reporting) is a relatively
rare event. However, when it does occur, the frauds (e.g., Enron and
WorldCom) can have a signifi cant effect on shareholders, employees, and
other parties. SAS No. 99 (AU 316) provides the relevant guidance for
auditors.

Required:
a. What is the auditor%u2019s responsibility for detecting fraud?
b. Describe the three conditions that are generally present when fraud
occurs?
c. What are the objectives of the %u201Cbrainstorming%u201D meeting that is held
among the engagement team members?
d. What is the required documentation for identifi ed risk factors?

Explanation / Answer

a)The auditor has a responsibility to plan and perform

the audit to obtain reasonable assurance about whether

the financial statements are free of material misstatement, whether caused by error or fraud

b)Incentive%u2014the pressure or reason to commit fraud, such as the possibility of defaulting on loan covenants or unexpected

personal bills that someone is unable to pay.

Opportunity%u2014the absence or the ineffectiveness of controls over assets or financial

reporting.

Rationalization%u2014allows a person to commit a dishonest act by relating it to ones own

ethical values and deeming it acceptable.

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