Fraud Risk Assessment
Fraud risk assessment is the auditor's responsibility to identify and assess risks of material misstatement due to fraud, including fraudulent financial reporting and misappropriation of assets.
Explanation
Under AU-C 240 (and PCAOB AS 2401), auditors must consider conditions known as the fraud triangle: incentive/pressure, opportunity, and rationalization/attitude. The auditor is required to presume that revenue recognition is a fraud risk and to evaluate the risk of management override of controls in every audit. Brainstorming sessions among the audit team are required to discuss how and where fraud could occur.
Key Points
- •Fraud triangle: incentive/pressure, opportunity, rationalization
- •Revenue recognition is a presumed fraud risk
- •Management override of controls must be evaluated in every audit
Exam Tip
The three required responses to fraud risk are: journal entry testing, review of estimates for bias, and evaluating the business rationale for unusual transactions.
Frequently Asked Questions
Related Topics
Professional Skepticism
Professional skepticism is an attitude that includes a questioning mind, alertness to conditions indicating possible misstatement due to fraud or error, and a critical assessment of audit evidence.
Internal Controls (Audit Perspective)
Internal controls are processes designed by management to provide reasonable assurance about the reliability of financial reporting, effectiveness of operations, and compliance with laws.
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