Seminar 1 Assurance Governance and Fraud PDF

SMU Classification: Restricted LEARNING OBJECTIVES 1. Explain the purpose of financial statement auditing. 2. Identify the persons responsible for the preparation of financial statements and fraud prevention. 3. Explain external auditor’s responsibility...

SMU Classification: Restricted LEARNING OBJECTIVES 1. Explain the purpose of financial statement auditing. 2. Identify the persons responsible for the preparation of financial statements and fraud prevention. 3. Explain external auditor’s responsibility towards fraud risks. 4. Distinguish between fraud arising from fraudulent financial reporting Audit is sub andaudit set of assurance, misappropriation of assets. is checking of fs so assurance is other things other than fs 1  SMU Classification: Restricted WHO IS EXEMPTED FROM THE STATUTORY AUDIT? A. “Small company” B. Exempt private company  Private company in the financial  Annual revenue < S$5 million year  < 20 members, none of whom is a corporation  Meets as least 2 of the 3 following criteria for immediate past two financial years C. Dormant unlisted company  Total assets at any time within the  Total annual revenue < S$10 financial year must not exceed million S$500,000  Total assets < S$10 million  Dormant from the time of formation or  No. of employees < 50 since the end of the previous financial 2 Source: year https://www.acra.gov.sg/legislation/legislative-reform/companies-act-reform/companies-amendment-act-2014/key-amendments-to-the-compa nies-act/key-changes-to-companies-act-relating-to-audit-and-preparation-of-financial-statements  SMU Classification: FS follow frs, for audit quality-follow Restricted ISQM BASIC TYPES OF AUDIT & ASSURANCE ENGAGEMENTS Nature of Financial Review Agreed Upon Engagement Statements Audit Procedures (AUP) Scope of Complete scope of Limited scope of work Specific procedures to procedures work done done be performed Comparative level Reasonable Moderate/limited No assurance. of assurance assurance assurance. Conforms provided by auditor Accurate and complete with applicable FR to a certain extent framework. Conclusion True and Fair, with No evidence that it is As per agreed upon no material NOT true and fair. No criteria. No judgment misstatements. material modifications necessary. required. Report provided Positive assurance Negative assurance Factual findings of on assertion(s) on assertion(s) procedures 3 Purpose Statutory audit Quarterly reporting or Renewal of grants as-per-needed  SMU Classification: Restricted QUESTION 1 WHAT IS THE PURPOSE OF A FINANCIAL YT VIDEOS: STATEMENTS WHAT IS AUDIT? AUDIT? HISTORY OF AUDIT 4  SMU Classification: Restricted WHY DO WE NEED AUDITS? Information Agency Theory Risk Technical Independe Trust competenc Distance nce e Misalignment of Biases and interests of Complexity of Remoteness of motives of FS owners and transactions information provider management 5 YT video - History of Audit: https://youtu.be/lThF1dBqrhs SMU Classification: Restricted ORIGINS OF MODERN AUDIT Source: The Future of Audit. Nineteenth Report of Session 2017-2019. House of Commons, Business, Energy and Industrial Strategy Committee. 26 March 6 2019.  SMU Classification: Restricted “The purpose of an audit is to enhance the degree of confidence of intended users in the financial PURPOSE OF statements. This is achieved by the expression of an opinion by the auditor on whether A FINANCIAL the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting STATEMENTS framework. In the case of most general purpose frameworks, that opinion is on whether the financial AUDIT statements are presented fairly, in all material respects, or give a true and fair view in accordance with the [SSA200.36] framework. An audit conducted in accordance with SSAs and relevant ethical requirements enables the auditor to form that opinion.” 7  SMU Classification: Restricted Private ltd-6mths audit Listed co-60 days audit Take too long GIVES ASSURANCE TO THESE Source: Johnstone, Auditing: A Risk-Based Approach, 11th Edition. ©2019 Cengage. USERS 8  SMU Classification: Restricted LEVEL OF ASSURANCE & EXPECTATIONS GAP Audit report gives a reasonable (high) level of assurance but there is still an expectations gap.  ‘Expectations gap’ is defined as the difference between the apparent public perceptions of the responsibilities of auditors and the legal and professional reality. Source: https://www.businesstimes.com.sg/wealth/wealth-investing/beware-crypt o-billionaires-boasting-audits 9  SMU Classification: Restricted LEVEL OF ASSURANCE & EXPECTATIONS GAP COMMON MISUNDERSTANDINGS Users misunderstand the meaning of an unmodified/unqualified auditor’s report, e.g.  The nature of audited financial statements, e.g. the audited FS will guarantee that the entity will continue topast Audit of exist figures does no guarantee future  The type and extent of work undertaken by auditors, e.g. all items in the FS are tested, all errors are uncovered in the process  The level of assurance provided by auditors, e.g. auditors provide absolute assurance that all the figures in the FS are 10 correct.  SMU Classification: Restricted QUESTION 2A WHO IS RESPONSIBLE FOR THE PREPARATION OF FINANCIAL STATEMENTS? 11 SMU Classification: Restricted WHICH ITEMS ARE RESPONSIBILITIES OF THE MANAGEMENT? 12 Everything except 68  SMU Classification: Restricted WHO IS Management understand that they have responsibilities: RESPONSIBLE a) For the preparation of the financial FOR THE statements in accordance with the PREPARATION applicable financial reporting framework… OF FINANCIAL b) For such internal control to enable the STATEMENT preparation of financial statements that (SSA200.4) are free from material misstatement, whether due to fraud or error… 13  SMU Classification: Restricted MANAGEMENT VERSUS AUDITOR RESPONSIBILITIES Source: Johnstone, Auditing: A Risk-Based Approach, 11th Edition. ©2019 Cengage. 14 SMU Classification: Restricted 15  SMU Classification: Restricted QUESTION 2B WHO IS PRIMARILY RESPONSIBLE FOR PREVENTING FRAUD? 16  SMU Classification: Restricted FRAUD PREVENTION Sharehold ers Accountability Elect  Primary responsibility lies with the management and board. Board of directors  Internal audit’s assessment and recommendation of controls limit Empower risk of fraud within the company. Managem ent 17  SMU Classification: Restricted : https://www.businesstimes.com.sg/companies-markets/tee-international-ex-ceo-borrowed-funds-for-personal-use-laws-may-have-been INTERNAL FRAUD PERSISTS… 1. WHO UNCOVERED THE FRAUD? 2. WHO SHOULD BE HELD ACCOUNTABLE? 18  SMU Classification: Restricted “Corporate governance refers to GOOD having (a) people with the character, competencies and CORPORATE commitment, supported by (b) appropriate structures and GOVERNANCE processes, to (c) direct and manage the company in an ethical manner. AND ETHICAL The objective of corporate STANDARD governance is to enhance long term shareholder value through enhancing performance, accountability and risk PREVENTS management, while taking into account the interests of other FRAUD stakeholders.” ~ Mak Yuen Teen (2010) ~ 19  SMU Classification: Restricted IMPORTANCE OF GOVERNANCE TO AUDIT Companies with good corporate governance are less risky because: Independent, competent and ethical board Robust internal control systems Result is that companies will be less susceptible to financial manipulations 20  SMU Classification: Restricted AUDIT COMMITTEE Role: independent directors (with experience in finance and accounting) to provide oversight of the internal and external audit function, preparing financial statements, e.g.  Reviewing and approving internal audit  Discussing audit findings with internal and external auditors 21  SMU Classification: Restricted SECTION 10 OF CORPORATE GOVERANCE CODE: AUDIT COMMITTEE FYI  SMU Classification: Restricted QUESTION 3 DO EXTERNAL AUDITORS HAVE AN OBLIGATION TO DETECT FRAUD? 23  SMU Classification: Restricted SSA DEFINITION OF FRAUD SSA 240.11 Definitions Fraud – An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage. Fraud risk factors – Events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to SSA 240.3 commit Responsibility for fraud. prevention & detection of fraud Primary responsibility for the prevention and detection of fraud rests with those charged with governance of the entity and management 24 SMU Classification: Restricted WHY IS THE RATE SO LOW?  2022 Global study on occupational fraud and abuse  Source: Association of Certified Fraud Examiners 25  SMU Classification: Restricted The objectives of the auditor are:  To identify and assess the risks of EXTERNAL material misstatement of the financial statements due to fraud; AUDITOR’S  To obtain sufficient appropriate audit RESPONSIBILITI evidence regarding the assessed risks ES REGARDING of material misstatement due to fraud, through designing and FRAUD& ERROR implementing appropriate responses; [SSA240.10] and  To respond appropriately to fraud or suspected fraud identified during the audit. 26  SMU Classification: Restricted LIMITATIONS OF AN EXTERNAL AUDIT ON FRAUD DETECTION (SSA 240.5-8) Obtain reasonable assurance that the financial statements are free from material misstatement relating either to error or fraud.  Due to ‘the inherent limitations of an audit, there is an unavoidable risk that some material misstatements of the financial statements may not be detected, even though the audit is properly planned and performed’.  IfRisk of not detecting it is intentional, it is bound MM to befrom harderfraud > Risk to uncover the of not detecting MM from fraud error  Risk of not detecting MM from management fraud > Risk not detecting MM Management from can over rideemployee fraud controls which employees 27 cannot  SMU Classification: Restricted FRAUD RISK RESPONSE TOWARDS MANAGEMENT OVERRIDE OF CONTROLS Selecting journal Complex transaction, end of reporting period, unusual entries for testing transactions, internal control overridden (SSA240.32(a)) Review accounting Evaluate management judgment for possible bias estimates Perform retrospective review of significant management (SSA240.32(b)) judgments Introduce Use different sampling technique, some testing at year unpredictability - end and some at interim review, Modify timing, nature increase sample size and extent of audit 28  SMU Classification: Restricted PROFESSIONAL SKEPTICISM (SSA240.12-14)  Requires an ongoing questioning of whether the information and audit evidence obtained suggests that material misstatement due to fraud may exist.  Notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and those charged with governance  Unless there is reason to believe otherwise, the auditor may accept records and documents as genuine.  Auditors to investigate inconsistencies in the responses of management or those charged with governance. 29  SMU Classification: Restricted PROFESSIONAL SKEPTICISM MEANS BEING ALERT TO SSA 200.A20 SSA 200.A21  Audit evidence contradicts other audit Maintaining professional scepticism is evidence obtained. necessary to reduce the risk of:  Information that brings into question the  Overlooking unusual circumstances reliability of documents and responses to  Over generalizing when drawing inquiries to be used as audit evidence conclusions from audit observations  Conditions that may indicate possible  Using inappropriate assumptions in fraud determing in the nature, timing and  Circumstances that suggest the need for extent of the audit procedures and audit procedures in addition to those evaluating the results required by the SSAs. 30  SMU Classification: Restricted QUESTION 4 WHAT ARE THE 2 COMMON FRAUDULENT MISSTATEMENTS? 31  SMU Classification: Restricted The auditor is mainly concerned with fraud that causes a material misstatement in the financial statements. Per SSA 240.3, they are: 1. Fraudulent financial reporting: perpetrated by someone who has a vested interest in, or who is held accountable for, the financial performance and position of an entity. FRAUD 2. Misappropriation of assets: involves the theft of an entity’s assets COMMONLY and is usually perpetrated by employees in relatively small and immaterial amounts. UNCOVERED DURING FINANCIAL STATEMENT AUDIT  2022 Global study on occupational fraud and abuse  Source: Association of Certified Fraud Examiners 32  SMU Classification: Restricted FRAUDULENT FINANCIAL REPORTING (FFR) Fraudulent reporting Examples via Early recognition of revenue Revenue Recognition Fictitious sales Intentional misstatement of accounting estimates Accounting estimates (e.g. sales return, provisions, accruals, liabilities) Transactions made outside the normal course of business Complex, unusual or Transactions involve non-consolidated related related party parties. E.g.disposing of unwanted liabilities or 33 transactions recording fictitious sales to unconsolidated related parties  SMU Classification: Restricted MISAPPROPRIATION OF ASSETS (MA) Misappropriation Examples via Misappropriating collections of accounts receivable Diverting receipts in respect of written-off accounts to personal bank Embezzlement accounts Stealing inventory for personal use or for sale Theft of physical Stealing scrap for resale assets or intellectual Colluding with a competitor by disclosing technological data in return property for payment Payments to fictitious vendors Inappropriate Kickbacks paid by vendors to the entity’s purchasing agents in return payments for goods for inflating prices and services not received Payments to fictitious employees 34 Inappropriate use of  SMU Classification: Restricted DRIVERS OF FRAUD Drivers Explanation Incentive or Pressure from sources pressure outside or inside the entity to achieve unrealistic financial results. Opportunity A perceived opportunity for an individual to commit fraud. Rationalisatio The ability or capacity that YT Video: https://youtu.be/7Slh3-Gso5g n enables people to justify or rationalise committing 35 fraud.  SMU Classification: Restricted GROUP Give a brief summary of the case DISCUSSIONS APPLYING THE Identify the type of fraudulent misstatement. FRAUD TRIANGLE TO Using the fraud triangle’s factors, explain LOCAL FRAUD how the fraudsters in both local cases were CASES able to commit the fraud. Describe an internal control that you would ARTICLE 1A TO implement to prevent the fraud. 1D 36  SMU Classification: Restricted RECALL THE KEY CONCEPTS WE HAVE GONE THROUGH 37