Fraud Risk Assessment in Financial Auditing

• The auditor should assess risks of material misstatement due to fraud at the financial statement level.
• The auditor should design and perform further audit procedures whose nature, timing, and extent are responsive to the assessed risks of material misstatement due to fraud at the assertion level.
• Management is in a unique position to perpetrate fraud because of management's ability to manipulate accounting records and prepare fraudulent financial statements by overriding controls that otherwise appear to be operating effectively. Although the level of risk of management override of controls will vary from entity to entity, the risk is, nevertheless, present in all entities. Due to the unpredictable way in which such override could occur, it is a risk of material misstatement due to fraud and, thus, a significant risk.

This quiz covers the assessment of risks of material misstatement due to fraud at both financial statement and assertion levels in financial auditing, as well as the unique risk posed by management's ability to perpetrate fraud.