Sri Lanka Auditing Standard 240 Overview

The three categories are actual, suspected, and alleged fraud.

The purpose of the inquiries is to determine if they have knowledge of fraud affecting the entity and to obtain their views on the risks of fraud.

The auditor must understand how those charged with governance oversee management's process for identifying and responding to fraud risks, as well as understand the internal controls for mitigating these risks.

<p>Inquiries are made to corroborate management's responses and ensure a comprehensive understanding of potential fraud risks.</p> Signup and view all the answers

<p>The auditor should be attentive to unusual or unexpected relationships found in analytical procedures, especially for revenue accounts.</p> Signup and view all the answers

<p>The auditor should consider other information obtained during the audit process, such as communications with management, internal controls, or observations made during the audit work.</p> Signup and view all the answers

<p>The auditor evaluates whether the information obtained from risk assessment procedures indicates the presence of any fraud risk factors.</p> Signup and view all the answers

<p>The auditor needs to gather sufficient evidence to determine whether or not the fraud risk factors indicate a risk of material misstatement due to fraud.</p> Signup and view all the answers

<p>Unpredictability helps prevent individuals familiar with typical audit procedures from concealing fraudulent financial reporting.</p> Signup and view all the answers

<p>Instead of relying solely on company records, the auditor might choose to conduct physical observation or inspection of certain assets, or utilize computer-assisted audit techniques to examine electronic transaction files.</p> Signup and view all the answers

<p>Concealing or not disclosing material facts can lead to a misleading representation of the entity's financial position and performance, potentially harming investors and stakeholders who rely on the accuracy of the financial statements.</p> Signup and view all the answers

<p>By performing audit procedures at unexpected times, the auditor can increase the chances of discovering irregularities that might be hidden during routine audits.</p> Signup and view all the answers

<p>The auditor might expand the scope of procedures by examining a larger sample size or performing tests on previously untested account balances or assertions based on their materiality or risk.</p> Signup and view all the answers

<p>The two main categories are fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting involves intentional misstatements or omissions in the financial statements to deceive users, while misappropriation of assets involves the theft of an entity's assets.</p> Signup and view all the answers

<p>By employing various sampling methods, the auditor can introduce an element of unpredictability to the selection of data or transactions for testing, making it harder for individuals to manipulate the selected samples.</p> Signup and view all the answers

<p>One example could be creating a series of related-party transactions designed to inflate revenue or hide losses. This can involve complex financial instruments or off-balance-sheet arrangements.</p> Signup and view all the answers

<p>This approach disrupts the usual routines and expectations of individuals involved in fraud, increasing the likelihood of catching them unprepared and potentially revealing hidden inconsistencies.</p> Signup and view all the answers

<p>Stealing physical assets can directly reduce the value of inventory or equipment, impacting the company's assets and potentially leading to understated losses. Stealing intellectual property can harm the company's competitive advantage, potentially impacting future revenue and profits.</p> Signup and view all the answers

<p>A manager could use the company's credit card for personal expenses, hiding the expense by classifying it as a business expense or creating false invoices.</p> Signup and view all the answers

<p>Management under pressure to meet earnings expectations may be tempted to inflate sales by using misleading accounting methods, which can be detected by obtaining corroborative information from sources outside the company.</p> Signup and view all the answers

<p>The auditor should design procedures focused on specific potential manipulation areas, consider the reliability of external sources, and balance the costs and benefits of obtaining such information.</p> Signup and view all the answers

<p>The auditor's responsibility in the public sector is often governed by specific laws, regulations, or mandates applicable to public entities, which may impose additional requirements or specific reporting obligations.</p> Signup and view all the answers

<p>False or misleading records or documents are records that are intentionally created or altered to disguise the theft of assets, such as creating fake invoices or altering inventory records.</p> Signup and view all the answers

<p>Auditors are responsible for identifying and assessing the risk of fraud, designing and performing audit procedures to respond to those risks, and communicating the results of their audit to the relevant stakeholders.</p> Signup and view all the answers

<p>The auditor might communicate with those charged with governance in situations where the fraud, even though not resulting in a material misstatement, might be considered significant or warrant attention.</p> Signup and view all the answers

<p>Early discussions help establish a clear understanding between the auditor and management about the communication process, fostering transparency and efficient information sharing.</p> Signup and view all the answers

<p>An auditor might seek legal advice when they have doubts about the integrity or honesty of management or those charged with governance, especially in situations where they are considering taking further actions.</p> Signup and view all the answers

<p>The auditor might discuss concerns about the competence and integrity of management, and the adequacy and completeness of authorization for transactions that appear to be outside the normal course of business.</p> Signup and view all the answers

<p>It can deceive financial statement users by influencing their perceptions of the entity's performance and profitability, ultimately impacting investor decisions and market valuation.</p> Signup and view all the answers

<p>A thorough evaluation of management's competence and integrity helps identify potential red flags regarding conflicts of interest, fraudulent activities, and potential misrepresentation of financial data.</p> Signup and view all the answers

<p>Management can implement more frequent assessments of existing controls, strengthen internal control systems to better prevent and detect fraud occurrences, and provide adequate training and awareness programs for employees.</p> Signup and view all the answers

<p>A strong control environment is essential in preventing and detecting fraud. By evaluating the control environment, the auditor can assess the effectiveness of internal controls, the culture of ethical behavior, and the overall risk of fraud occurring.</p> Signup and view all the answers

<p>The two characteristics are involvement of unidentified related parties and parties lacking the financial strength to support the transaction without assistance.</p> Signup and view all the answers

<p>The primary basis is the auditor's judgment, taking into account the audit procedures performed and the evidence obtained.</p> Signup and view all the answers

<p>Appendix 3 contains examples of circumstances that may indicate a possibility of fraud. These could include unusual year-end revenue and income patterns, inconsistent trends in cash flow, or numerous misstatements at specific locations even if not material in aggregate.</p> Signup and view all the answers

<p>Because these relationships might indicate attempts to manipulate reported income levels during the final period of the reporting year.</p> Signup and view all the answers

<p>Fraud typically involves incentive/pressure, opportunity, and rationalization. Since fraud isn't often isolated, the discovery of misstatements may point to existing fraud, highlighting the 'opportunity' and suggesting that further investigation is needed to see if other elements of the 'fraud triangle' are present.</p> Signup and view all the answers

<p>Because it indicates a higher level of potential fraud risk and could point to systemic issues within the organization's control environment.</p> Signup and view all the answers

<p>They help the auditor form an overall conclusion about the financial statements. By examining trends and relationships, they can spot potential material misstatements, particularly those related to fraud.</p> Signup and view all the answers

<p>It helps the auditor determine if their initial assessment of risks was accurate and if additional or different procedures are needed to address potential fraud risks.</p> Signup and view all the answers

<p>An auditor may be required to report fraud to authorities outside of the client entity in cases where statutory duties or legal obligations mandate such reporting. This could include situations where the auditor is obligated to report fraud to regulators, such as in the financial services industry, or when management fails to take corrective action, leading to a legal requirement for external disclosure.</p> Signup and view all the answers

<p>The three conditions generally present when material misstatements due to fraud occur are: incentives/pressures, opportunities, and attitudes/rationalizations.</p> Signup and view all the answers

<p>Public sector entities may have specific provisions within their audit mandates, related laws, regulations, or other authorities that dictate the reporting of fraud, whether or not it was discovered through the audit process.</p> Signup and view all the answers

<p>An auditor may seek legal advice to determine the appropriate course of action when dealing with potential fraud to ascertain the steps necessary in considering the public interest aspects of identified fraud. This helps ensure the auditor complies with applicable legal and ethical obligations.</p> Signup and view all the answers

<p>The two main types of fraud relevant to an auditor's considerations are fraudulent financial reporting and misappropriation of assets.</p> Signup and view all the answers

<p>'Opportunities' in the context of fraud risk factors refer to the circumstances or situations that allow individuals to commit or conceal fraudulent acts. This could include weak internal controls, lack of oversight, or a lack of segregation of duties.</p> Signup and view all the answers

<p>Failing to report fraud when required by law or regulation can have serious consequences for an auditor, including disciplinary action from professional bodies, legal liability, and reputational damage.</p> Signup and view all the answers

<p>An auditor's professional judgment can be challenged in situations involving fraud risk, especially when there are conflicting obligations, such as the duty of confidentiality and the legal requirement to report fraud. The auditor must exercise independent judgment and professional skepticism to make the appropriate decisions.</p> Signup and view all the answers

Auditors question management and others to find out if there is any known fraud.

Auditors inquire internal audit functions about suspected fraud risks.

Auditors understand how governance oversees fraud risk management by management.

Auditors ask governance about their knowledge of fraud to verify management's responses.

Auditors evaluate unexpected relationships found in analytical procedures for fraud risks.

Auditors consider additional information that may suggest fraud risk.

Auditors assess if assessed information shows presence of fraud risk factors.

Auditors check if relationships or information indicate risks of misstatements due to fraud.

The auditor may discuss fraud awareness with those charged with governance.

Fraud by staff other than management that doesn't cause material misstatement.

Auditors may seek legal advice if they doubt management's integrity.

The auditor assesses the entity's control environment for fraud risks.

Management's evaluation of fraud prevention and detection measures.

Circumstances where management fails to address identified control issues.

Management's actions may signal intent to manipulate financial results.

Ensuring all business transactions are properly authorized and documented.

Failure to recognize events or transactions during the reporting period.

Hiding information that affects financial statement amounts.

Transactions structured to misrepresent financial performance.

Theft of an entity’s assets, often by employees or management.

Misappropriating funds, like diverting payments to personal accounts.

Payments made to suppliers that do not actually exist.

Utilizing company resources for personal gain.

Auditors must follow specific laws and mandates regarding fraud.

Incorporating randomness in the selection of audit procedures to prevent concealment of fraud.

Detailed tests performed on account balances and assertions to gather direct evidence.

Different techniques used by auditors to select representative transactions for testing.

Refers to the specific type and technique of audit procedures carried out.

Adjusting when audit procedures are performed to enhance their effectiveness.

Additional evidence obtained to support primary audit findings.

The possibility that financial statements are incorrect due to fraud or error.

Use of software tools to assist auditors in analyzing data from electronic sources.

Entities connected that may impact transactions and audit evaluations.

Standard requiring auditors to assess risks of material misstatement.

A significant error affecting financial statement reliability.

Circumstances suggesting potential occurrence of fraud.

Auditor's discretion in assessing risks and making evaluations.

Uncommon trends in income that may signal fraud risk.

Repeated small errors that may hint at broader fraud risks.

Fraud may not be isolated; involves incentives or pressures.

The auditor must keep client information confidential unless overridden by law.

Auditors' legal duties vary by country and may include reporting fraud.

In some countries, auditors must report fraud to authorities.

Auditors report misstatements if management fails to act.

Public sector auditors have specific laws for reporting fraud.

Conditions that may indicate potential for fraudulent activities.

Fraud relevant to auditors: financial reporting fraud and asset misappropriation.

Includes incentives, opportunities, and attitudes leading to fraud.