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try referring from the attached slides

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COLLEGE OF BANKING AND FINANCIAL STUDIES

DEPARTMENT OF UNDERGRADUATE PROGRAMME

B.Sc. in Accounting, Auditing and Finance

ASSIGNMENT BRIEF/Individual or Group

Weightage: 30%

Student Name & ST Number

Semester

8

September – December 2021

Assignment Title

Practical implication in adherence to the Code of Ethics and identification of fraud risk factors.

Module

UG 034 – Ethics and Conduct of Accounting Profession

Assessor:

Ms. Nandini Balaji/ Ms. Mariam Hassen

Start Date:

Internal Verifier

Mr. Mohammed Farzan

Due Date:

Required Work, Format and Grading

You must submit the following by the assignment due date:

1. Completed answers to each task, making sure that you fully address each of the outcome criteria.

· Answer all questions separately.

· Assignments without TURNITIN report will not be accepted.

Resources:

You need to demonstrate a confident application of the theories to the assignment task. The theoretical underpinning of your observations and deliberations should also demonstrate a good understanding of the subject by the way that your analysis is structured.

You can access the Internet to research about the topic. You should demonstrate good academic practice by the appropriate use of academic texts and journals that are properly referenced.

Guidelines and further information about assignment:

Assignment must be submitted with the “Turnitin” report. If the report generated indicates a similarity index percentage of 20% or more, a review of your assignment is necessary to ensure the same is reduced to less than 20%.

Student declaration:

I certify that the work contained in this assignment was researched and prepared by me:

Signature: ___________________________ Date: ___________________

Submission time and date

You should submit the assignment by the time and date mentioned otherwise a ‘NA’ will be awarded. Fill in the form cover and staple it with your assignment. Make sure that all the relevant details are complete. Assignments must be submitted by the due date. You may include diagrams, figures etc without word penalty.

Plagiarism Writing

1. Plagiarism occurs if you use somebody else’s work in an assignment or exam answer, but fail to state where you got the material from. You need to be also very careful about the amount of words you are using from somebody else’s work.

2. It can happen in any type of assessment where you are given the questions or tasks in advance.

3. If another student uses your work in his/her answer(s), both you and he/she will be punished when caught.

4. Punishments for committing plagiarism can be very severe.


Details

Plagiarism is a form of cheating in which students use the work of others and present it as their own. It may include all or any one of the following –

1. Copy extensively from the work of others (from sources such as books, magazines, journal, web-sites etc) and submit the work as your own.

2. Copy another students’ work and submit it for assessment under your own name.

3. Allow another student to copy your work and then submit it for assessment under their own name.


What happens if you get caught?

The examining body of CBFS may punish offending students in any manner that they deem fit. Typical punishments may range from reduction in grades, making students re-sit modules and even failing students on a module or an entire award. The college considers this form of cheating as a serious offence. Therefore be forewarned!


Scenario

You are the audit manager of Ahmed and Saif Chartered Accountants. You are at the planning stage of the audit for Omancell for the year ended 31 December 2021. Omancell is a high-end retailer of latest flagship model mobile phones. Given below are the notes that you have made following a meeting with Mr. Omar, the financial controller:

Omancell has been facing tough competition in the market. The Covid pandemic has worsened it, as customers now prefer online retailers. This has resulted in physical retailers going out of business.

A new management structure has been implemented. There are new divisional managers appointed with the shop managers reporting to them. There are approximately 10 shops under each divisional manager. The divisional managers have been given challenging financial targets, with substantial incentives linked to these targets, with the aim of motivating them to achieve it. In the previous board meeting it has been decided to cut the bonus amount paid to the shop staff for the festive season.

In response to the recommendations made in the previous year’s Report to Management, Omancell has brought a couple of new changes. Firstly, the company has also sold several of the shops they owned under the sale and leaseback arrangements and have made a gain on the same. They have also put a new inventory management system into place. In the initial months after implementation, there were difficulties in the operation of the system. However, a detailed report has been submitted to the Board in their previous meeting, by Abdullah, the chief accountant, confirming that the issues were fixed and now the system is producing reliable information for Omancell’s use. Omar commented that Abdullah took the initiative to sort the issues with the system, especially working long hours including weekends and refusing to take leave until the system was functioning well. The company has also sold several of the shops they owned under the sale and leaseback arrangements.

In the course of your work you also come across instances of non-adherence to management policies. When talking to a couple of divisional managers about this you understand that the divisional managers are unhappy with the large number of policies in place as it is time consuming to keep up. You also understand that they reluctant to have controls in place as they feel it is cumbersome and involves lot of paperwork.

Omancell is considering to raise new capital by share issue post year end, to finance an online presence to keep up with customers’ changing preference and also to expand into other Middle East countries. Hence, Omar has requested that the signed audit report be provided by 1st February 2022 (4 weeks earlier than usual). Omar has also offered to provide the latest flagship phones of high-end companies as a gift for their hard work.

Omar has completed CPA and, in his studies, and continuous professional development sessions heard about the need for accounts to act in public interest. Omar has requested that Fathima, an audit senior in your department be assigned to the audit of Omancell. Fathima does not have experience in audits of retail sector and has not been previously assigned to the audit of Omancell. On further investigation, you understand that Fathima is Omar’s niece.

During the year the company has established a pension plan for the employees. Omar has asked you to speak to the engagement partner about providing valuation services for the same.

a. Using Professional skepticism, identify and explain the fraud risk factors that your audit team has to keep an eye out for during your audit of Omancell. (15 marks)

b. Identify and evaluate the violations to ethical principles, including the nature of threats it poses. Also recommend suitable actions Omancell can take to mitigate these threats. (10 Marks)

Word Limit of 2500 word (10% + or -)

(Total 25 Marks)


Guidelines

The written report must include a;

· Title Page

· Table of Content

· Introduction

· Content

· Part A

· Part B

· Conclusion

· Reference List (Harvard Style)

(5 Marks)


Assignment Rubrics – Level 8

Marks/Grades

Criterion

90-100

A

85-89

A-

74-84

B

56-73

C

55-55

D

0-49

F

Knowledge

20%

Shows well-coordinated understanding of subject

Sound understanding of subject matter

Major facts are understood

Shows understanding of basic issues/theory

Minimal understanding of basic issues/topic

No understanding of the topic/subject area

Analysis 50%

Touches upon all relevant issues/theory. Concise analysis

Detailed coverage of basic concepts/theory. Reasonable coverage of subtle issues/theory

Reasoned argument and sequencing

Shows evidence of understanding of concepts. Coverage of obvious ideas.

Fails to identify subtle issues/theory. Captures obvious ideas.

No or minimal understanding of the key theories/topic

Research 10%

Excellent referencing and reading in all areas

Use of up-to-date resources. Well informed and generally accurate information provided.

Appropriate referencing

Adequate referencing and reading.

Weak reading and referencing

Poor referencing. Shows lack of reading/references out of date

Relevance 10%

All material used is of relevance

Material used is relevant

Discussion shows relationship to theory

Some material repetitive

Some repetitive matter. Irrelevant

No relevance to subject matter

Conclusion 10%

Excellent conclusion. Brings together all concepts and adds an original perspective

Intelligent conclusion. Good application of knowledge

Methods incorporate modifications used

Conclusion in place but key points missing. Reasonable application of knowledge

Weak conclusion and content. Satisfactory application of ideas/theory

Poor conclusion. Poor knowledge application.


Presentation – Rubrics


Marks/Grades

Criterion

90-100

A

85-89

A-

74-84

B

56-73

C

55-55

D

0-49

F

Delivery

25%

Shows well-coordinated delivery with confidence

Sound coordinated delivery with confidence

Some evidence of coordinated delivery with confidence

Basic coordinated delivery with average confidence

Minimal coordinated delivery with limited confidence

No evidence of coordinated delivery with low confidence

Methods

25%

Creative quality of PPT slides

Sound quality of PPT slides

Some evidence of quality of PPT slides

Shows basic quality of PPT slides

Minimal evidence of quality of PPT slides

No evidence of quality of PPT slides

Structure

25%

Shows well-coordinated logical structure & flow

Sound logical structure & flow

Evidence of logical structure & flow

Shows basic logical structure & flow

Minimal logical structure & flow

No evidence of logical structure & flow

Content

25%

Shows well-coordinated evidence of coherent, insightful & explicitly relevant answer to the question

Sound evidence of coherent, insightful & explicitly relevant answer to the question

Some evidence of coherent, insightful & explicitly relevant answer to the question

Shows basic coherent, insightful & explicitly relevant answer to the question

Minimal evidence of coherent, insightful & explicitly relevant answer to the question

No evidence of coherent, insightful & explicitly relevant answer to the question

COLLEGE OF BANKING AND FINANCIAL STUDIES

UNDERGRADUATE DEGREE PROGRAMME

B.Sc. in Accounting, Auditing and Finance
Semester – 8

MODULE TITLE: ETHICS AND CONDUCT OF ACCOUNTING PROFESSION

Chapter 4: Ethics and Professional Judgement in Accounting

Learning Objectives

After studying Chapter 4, you should be able to:

Explain how professional judgement and skepticism influence ethical decision making

Discuss how the public interest may be affected by commercial activities of CPAs

Understand the importance of Code of Ethics.

Explain the fundamental ethical principles

Explain the threats and safeguards approach to independence

4.1 What is Professional Judgement In Accounting

Judgement is the process of reaching a decision or drawing a conclusion where there are several possible alternative solutions.

Judgement occur in a setting of uncertainty, risk and often conflict of interest.

Professional judgement is influenced by personal behaviour traits (attitudes and ethical values) as well as one’s knowledge of accounting and auditing issues in question

Professional judgement, which is the bedrock of the accounting and auditing profession, it is referenced through out the professional judgement.

Professional Judgement

Ability to diagnose

Ability to solve

Knowledge

Skills

+

=

Professional Judgement

4.1.1. KPMG Professional Judgment Framework

The KPMG framework identified five components of professional judgment that revolve around one’s mindset.

The components are;

Clarify issues and objectives

Consider alternatives

Gather and evaluate information

Reach conclusion

Articulate and document rationale.

Auditor should approach matters objectively and independently, with inquiring and incisive minds.

Professional Skepticism is required to avoid judgment traps and tendencies that leads to bias.

4.1.2. Professional Skepticism

In addition to possessing the requisite skills, the auditing standards stipulate that auditors must maintain professional skepticism, arguably one of the auditor’s most important responsibilities.

Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence.

The auditor uses the knowledge, skill, and ability called for by the profession of public accounting to diligently perform, in good faith and with integrity, the gathering and objective evaluation of evidence

An audit of financial statements in accordance with generally accepted auditing standards should be planned and performed with an attitude of professional skepticism.

In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest.

4.2. Discuss How the Public Interest may be Affected by Commercial Activities of CPAs.

Professional judgement is what makes an accountant a professional and it underlies the fundamental obligation to protect public interest.

The auditor fulfills what Justice Burger calls “ a public watchdog function.”

Following the disclosure of numerous accounting scandal the public lost trust in the accounting profession. And professional bodies turned their attention to examining how to rebuild the public trust and confidence in financial reporting.

4.2. Discuss How the Public Interest may be Affected by Commercial Activities of CPAs.

Widely agreed that the purpose, nature, and responsibility of business are to maximize profit or shareholder value.

An accounting firm main function is to attesting to the truth and correctness of financial statements.

But to the extent that, an accounting firm is treated as a business, and it falls under the profit maximizing rubric

The movement in accounting from auditing and attesting functions to management consulting changed it from a profession

dedicated to public services

to a business committed to maximizing partner or shareholder wealth.

4.3 Global Code of Ethics

A code of ethics is a set of rules outlining the social norms and rules and responsibilities of, or proper practices for, an individual, party or organization.

Accountants have a responsibility to present the most truthful and accurate financial pictures of an organization.

As auditors, they have a responsibility to evaluate other accountants ’ pictures and attest to their truthfulness and accuracy.

The accounting profession has developed multiple codes of ethics that set the standards for accountants ’ behaviour, standards that require more than simply adhering to the letter of the law.

4.3.1. Importance of Codes of Ethics

Business Ethics mention the six ways that codes of conduct can be valuable:

A code can motivate through using peer pressure, by holding up a generally recognized set of behavioural expectations that must be considered in decision making.

A code can provide more stable permanent guides to right or wrong than do human personalities or continual ad hoc decisions.

Codes can provide guidance, especially in ambiguous situations.

Codes not only can guide the behaviour of employees, they can also control the autocratic power of employers.

Codes can help specify the social responsibilities of business itself.

Codes are clearly in the interest of business itself, for if businesses do not police themselves ethically, others will do it for them.

4.3.2 International Standards on Code of Ethics for Professional Accountants

International Federation of Accountants (IFAC)

Code of Ethics for Professional Accountants,

updated in 2009 by the

International Ethics Standards Board for Accountants (IESBA)

IESBA develops ethical standards and guidance for professional accountants.

The IESBA encourages member bodies to adopt high standards of ethics for their members and promotes good ethical practices globally.

4.3.3. International Federation of Accountants (IFAC)

The International Federation of Accountants (IAFC) is the worldwide organization for the accountancy profession.

Founded in 1977, its mission is to serve the public interest by continuing to strengthen the worldwide accountancy profession and contributing to the development of strong international economies

IFAC is comprised of over 175 members and associated in more than 130 countries and jurisdictions, representing almost 3 million accountants in public practice, education, government service, industry and commerce.

In order to reinforce professional accountants’ adherence to the values mentioned above IESBA issued the Code of Ethics for Professional Accountants.

4.3.4. Code of Ethics for Professional Accountants

IESBA Code of Ethics for Professional Accountants establishes ethical requirements for professional accountants.

A member body of IFAC or firm shall not apply less stringent standards than those stated in this code.

Some of the member body of IFAC

American Institute of Certified Public Accountants (AICPA) – USA

Institute of Management Accountants (IMA) – USA

Association of Accounting Technicians (AAT) – UK

Association of Chartered Certified Accountants (ACCA) – UK

Chartered Institute of Management Accountants (CIMA) – UK

Professional Accountancy Organization in Oman is Omani Association of Accountant, currently not a member of IAFC.

4.4. Fundamental Principles

The Professional accountant shall comply with the following fundamental principles

Integrity

Objectivity

Professional Competence and Due Care

Confidentiality

Professional Behaviour

4.4. Fundamental Principles

Integrity

To be straight forward and honest in all professional and business relationships

Objectivity

To not allow bias, conflict of interest or undue influence of others to override professional or business judgments

4.4. Fundamental Principles

Professional Competence and Due Care

To maintain professional knowledge and skill at the level required to ensure competent professional services based on current developments in practice, legislation and techniques

To act diligently in accordance with applicable technical and professional standards

4.4. Fundamental Principles

Confidentiality

To refrain from disclosing confidential information acquired as a result of professional and business relationships without proper and specific authority to disclose unless there is a legal or professional right or duty to disclose

To refrain from using confidential information acquired as a result of professional and business relationships for personal advantage or the advantage of third parties

4.4. Fundamental Principles

Professional behavior

Obligation to comply with relevant laws and regulations and avoid any action that discredits the profession

4.5. Conceptual Framework Approach – Threats and Safeguards

4.5. Conceptual Framework Approach – Threats and Safeguards

Threats are created by circumstances and relationships that could compromise an accountant’s ability to comply with the fundamental principles.

Safeguards are actions or other measures that may eliminate threats or reduce them to an acceptable level

The steps of Risk based approach

Identifying and evaluating threats to independence

Determining whether safeguards already eliminate or sufficiently mitigate the identified risk

Determine whether independence is impaired

4.5.1 Threats to Independence

To appear to be independent, the CPA should avoid circumstances that might cause an informed third party to reasonably conclude that the integrity, objectivity or professional skepticism of a firm or member of the audit engagement team has been compromised

Threats to independence

Self-Review Threat

Advocacy Threat

Adverse Interest Threat

Familiarity Threat

Undue Influence Threat

Financial Self-Interest Threat

Management Participation Threat

Self Interest Threat

A self-interest threat is the threat that a financial or other interest will inappropriately influence the professional accountant’s judgement or behavior.

Self-interest threats may arise as a result of the financial or other interests of members or of immediate or close family and are summarized in the diagram below.

Self Review Threat

A Self-review threat occur when a CPA reviews evidence during an attest engagement that is based on her own or her firm’s non-attest work. The key area in which there is likely to be a self-review threat is where an assurance firm provides services other than assurance services to an assurance client (providing multiple services).

Eg: Preparing source documents used to generate the client’s financial statements

Advocacy Threat

An advocacy threat occurs when a CPA promotes an attest client’s interests or position in such a way that objectivity may be, or may be perceived to be, compromised.

Eg: Promoting the client’s securities as part of an initial public offering

Eg. when a firm offered legal services to a client and, say, defended them in a legal case or

provided evidence on their behalf as an expert witness.

Eg. If the firm carried out corporate finance work for the client, for example, if the audit firm was involved in advice on debt reconstruction and negotiated with the bank on the client’s behalf.

.

Familiarity Threat

A familiarity threat arises where independence is jeopardised by the audit firm and its staff becoming over familiar with the client and its staff. There is a substantial risk of loss of professional scepticism in such circumstances.

We have already discussed some examples of when this risk arises, because very often a familiarity threat arises in conjunction with a self-interest threat.

Eg: A CPA on the attest engagement team whose spouse is the client’s CEO.

Intimidation Threat

An intimidation threat arises when members of the assurance team have reason to be intimidated by client staff.

Examples of intimidation threats
A threat of dismissal from a client engagement, if it continues to disagree with the client/plans to modify the auditor’s report
A threat of not giving a firm a contract for non-assurance work
A threat of litigation by the client
Pressure to reduce the amount of work done in order to reduce fees
Pressure to agree with the client because the client has more experience on the matter
A partner within the firm telling a member of the audit team that they will not be promoted if they disagree with the client

4.5.1 Threats to Independence

Undue Influence Threat

An undue influence threat results from an attempt by the management of an attest client or other interested parties to coerce the CPA or excessive influence over the CPA

Eg: A threat to replace the CPA or CPA firm because of a disagreement with the client over the application of an accounting principle.

Financial Statement Threat

The threat that a financial or other interest will inappropriately influence the professional accountant’s judgement or behavior.

Examples: Having a loan from the client, from an officer or director of the client.

4.5.1 Threats to Independence

Management Participation Threat

A management participation threat occurs when a CPA takes on the role of client management or otherwise performs management functions on behalf of an attest client.

Adverse Interest Threat

An adverse interest threat occurs when a CPA takes actions that are in opposition to an attest client’s interests or positions.

Eg: Commencing or the expressed intention to commence, litigation by either the client or the CPA against the other.

https://www.coursera.org/lecture/auditing-part1-conceptual-foundations/threats-to-independence-3Lldj

4.5.2. Safeguards

Two categories:

Safeguards

Created by the profession, legislation or regulation

In the work environment

4.5.2 Safeguards created by the profession, legislation or regulation

Educational, training and experience. requirements for entry into the profession.

Continuing professional development requirements.

Corporate governance regulations.

Professional standards.

Professional or regulatory monitoring and disciplinary procedures.

External review by a legally empowered third party of the reports, returns, communications or information produced by a professional accountant.

Examples of Safeguards in Work Environment

Reference

Steven , M. M., & Roselyn, E. M. (2017). Ethical Obligation and Decision Making in Accounting (4 ed.). New York: McGraw- Hill Education.

ACCA BPP P7 Study Text.

COLLEGE OF BANKING AND FINANCIAL STUDIES

UNDERGRADUATE DEGREE PROGRAMME

B.Sc. in Accounting, Auditing and Finance
Semester – 8

MODULE TITLE: ETHICS AND CONDUCT OF ACCOUNTING PROFESSION

Chapter 5: Fraud in Financial Statements and Auditor Responsibilities

Learning Objectives

After studying Chapter 5, you should be able to:

Distinguish between audit requirement for errors, fraud and illegal act.

Explain the component of the Fraud Triangle

Describe fraud risk assessment procedures

Explain the standards for audit reports

Discuss the characteristics of professional skepticism

5.1 Fraud in Financial Statement

The primary responsibility for the prevention and detection of fraud rests with both those charges with governance of the entity and management..

A strong emphasis should be placed on fraud prevention, which may reduce opportunities for fraud to take place.

Fraud deterrence, which could persuade individuals not to commit fraud because of the likelihood of detection and punishment.

As mention in Chapter 3. this involves a commitment to creating a culture of ethical behaviour, tone at the top, and reinforced through governance structure.

Fraud deterrence involves conditions and procedures analysis to keep fraud from taking place. Could include the use of detection systems to spot fraud before it worsens. The cost of fraud deterrence is a fraction of the cost of the fraud being prevented.

3

5.1 Fraud in Financial Statement

An auditor conduction an audit is responsible for obtaining reasonable assurance that the financial statements as a whole are free from material misstatements, whether caused by error or fraud.

Due to inherent limitation of an audit, there always exist an unavoidable risk.

The auditing profession recognized its obligation to look for fraud by being alert to certain red flags,

assessing the control environment of the organization.

Passing judgment on internal controls

Considering the audit risk and materiality

When performing the audit

5.1 Fraud in Financial Statement

Nature and Cause of Misstatements;

Misstatements in the financial statements can result from errors and fraud and may consist of any of the following;

An inaccuracy in gathering or processing data from which financial statements are prepared.

A difference between the amount, classification or presentation of a reported financial statement element, account, or item and the way that it should have been reflected under Accounting standards.

The omission of a financial statement element, account or item.

An incorrect accounting estimate due to oversight, misrepresentation of facts and fraud.

Omission of disclosure requirements.

Accounting estimate is an approximation of the amount to be debited or credited on items for which no precise means of measurement are available. They are based on specialized knowledge and judgment derived from experience and training. 

Useful life of non-current assets

Impairment of non-current assets

Bad debts

Provision for obsolete and slow-moving stock

5

Misstatements in the Financial Statements could be due to fraud or error.

There are also other unlawful activities like corruption, money laundry and others.

Error

Fraud

Other Unlawful/Illegal activities.

5.1 Fraud in Financial Statement

Errors, Fraud, and Illegal Act.

Material errors, fraud and illegal acts represent situations where the financial statements should be restated.

Error in Financial Statement

An error can occur due to unintentional misstatements or omissions of amounts or disclosures in the financial statements.

Errors may involve mistakes in gathering or processing data, unreasonable accounting estimates.

Auditors are responsible for detecting errors that have a material effect on the financial statements and reporting their findings to the audit committee.

5.1 Fraud in Financial Statement

Auditors should be sensitive to red flags that warn fraud is possible.

The intentional act of fraud occur when an individual(s) in management, those charged with governance, employees or third parties, use deception in a way that results in a material misstatement in the financial statements.

Most common form of fraud is, management fraud involves top management’s deceptive manipulation of financial statements.

Illegal Acts

Illegal acts are violations of laws or governmental regulations.

Eg: a violation of the Foreign Corrupt Practices Act that prohibits bribery constitutes and illegal act.

Illegal acts expose the company to both legal liability and public disgrace.

Auditor’s responsibility is to detect and report misstatements resulting from illegal acts that have direct and material effect on the determination of financial statement amounts.

The auditor should assure him/herself that the audit committee is informed as soon as practicable and prior to the issuance of the auditor’s report with respect to illegal acts that come to the auditor’s attention.

ILLEGAL

ACT

The Sarbanes – Oxley Act 2002 ( SOX )

Why was the Act passed?

Financial scandals at Enron, WorldCom, and others

Desire to restore investor confidence and increase the transparency of the financial statements of publicly traded companies

Desire to protect investors by improving the accuracy and reliability of corporate disclosures

The Sarbanes – Oxley Act 2002 ( SOX )

The Sarbanes – Oxley Act was designed primarily to regulate corporate conduct in an attempt to:

promote ethical behaviour and

Prevent fraudulent financial reporting.

The legislation applies to companies’

Board of Directors

Audit committee

Chief Executive Officer

Chief Financial Officer

Other management personnel who have influence over the accuracy and adequacy of external financial reporting.

ALTHOUGH, SARBANES-OXLEY IS NOT THE LAW IN OMAN, IT IS APPARENT THAT ENRON AND THE REQUIREMENTS OF SARBANES-OXLEY WERE CONSIDERED WHEN THE CAPITAL MARKET AUTHORITY (CMA) ISSUED OMAN’S FIRST CODE OF CORPORATE GOVERNANCE IN NOVEMBER 2002 (CIRCULAR 11/2002).

Sarbanes – Oxley Act

Includes reforms in corporate governance and accounting profession intended to:

Improve corporate financial reporting and internal control

Strengthen audit committees

Change the relationship between auditor and client

Improve auditor independence

Provide additional auditor assurance

Provide oversight and regulation for auditors of publicly traded companies.

Types of Internal Frauds

Internal Frauds

Asset Misappropriation

Fraudulent Statement

Cash

Non cash

Financial

Conflict of interest

Bribery and extortion

Corruption

Fraudulent Financial Reporting

This is usually in the form of falsification of financial statements in order to obtain some form of improper

benefit.

Management intentionally makes false entries to make the company looks more profitable (cook the books of accounts)

Deceives investors and creditors

Fraudulent financial reporting

Manipulation/falsification/alteration of accounting records.

Omission of events, transactions or significant information in the financial statements.

Intentional misapplication of accounting principles

Misappropriation of Assets

This involves the theft or misuse of an organisation’s assets.

Asset misappropriation fraud happens when people who are entrusted to manage the assets of an organisation steal the assets. Asset misappropriation fraud involves third parties or employees in an organisation who abuse their position to steal from it through fraudulent activity. It can also be known as insider fraud.

This type of fraud can be committed by company directors, or its employees, or anyone else entrusted to hold and manage the assets and interests of an organisation.

Misappropriation of assets

Embezzling receipts

Stealing company assets/inventory

Causing an entity to pay for goods not received

Using assets for personal use

Examples include theft of plant, inventory or cash, false invoicing, accounts receivable fraud, and payroll fraud

Bribery and corruption

Corruption can be defined as deviation from honest behavior.

This includes activities such as the use of bribes or acceptance of ‘kickbacks’, improper use of confidential information, conflicts of interest and collusive tendering.

Various forms of corruption include the following:

BRIBERY: offering/giving/receiving/soliciting of any item of value to influence the actions of an official or other person in charge of a public or legal duty.it may not be money/tangible gift. It can be a privilege. It need not be paid and can be just promised.

ABUSE OF A SYSTEM: using a system for improper purpose

BID RIGGING: Promising a contract in advance to one party, although other parties have been invited to bid for the contract.

CARTEL: a secret agreement by supposedly competing producers to fix prices, quantity or market share.

INFLUENCE PEDDLING: Using personal influence in government or connections with persons in authority to obtain favors or preferential treatment for another, usually in return for payment

Opportunities

Attitudes/ rationalisations

Incentive/ pressure

The fraud triangle factors are used to understand the reason for a person’s decision to commit fraud. It consists of three components which, together, lead to fraudulent behaviour

These factors are generally present when misstatements due to fraud occur.

Pressure/Incentive

This is the motivational factor that pushes the person to commit fraud.

Opportunities

These are the circumstances that enable fraud to be perpetuated.

Attitude/Rationalisation

This is the justification that is given for committing the fraud.

5.2 FRAUD TRIANGLE

Pressure

In simple terms, motivation is typically based on either greed or need. Stoy Hayward’s (BDO) most recent FraudTrack survey found that greed continues to be the main cause of fraud, resulting in 63% of cases in 2007 where a cause was cited.

Financial pressure is the most common type of pressure to commit fraud.

The Element of Pressure

Financial pressures

Vices

Work-related pressures

Other pressures

5.2 Fraud Triangle

The Element of Pressure

Financial Pressures Vice Pressures Work-related Pressures
Greed

Living beyond one’s means

High bills or personal debt

Poor credit

Personal financial losses

Unexpected financial needs

1.Gambling

2.Drugs

3.Alcohol

4.Expensive extramarital relationships

Motivated by these factors:
Getting little recognition
Feeling job dissatisfaction
Fear of losing one’s job
Being overlooked for a promotion
Feeling underpaid

Opportunity

In terms of opportunity, fraud is more likely in companies where there is a weak internal control system, poor security over company property, little fear of exposure and likelihood of detection, or unclear policies with regard to acceptable behavior.

Six major factors that increase opportunity:

Lack of controls

Inability to judge performance quality

Fail to discipline fraudsters

Lack of access to information

Ignorance, apathy and incapacity

Lack of audit trail

Rationalization

Many people obey the law because they believe in it and/or they are afraid of being shamed or rejected by people they care about if they are caught.

However, some people may be able to rationalize fraudulent actions as:

Necessary – especially when done for the business

Harmless – because the victim is large enough to absorb the impact

Justified – because ‘the victim deserved it’ or ‘because I was mistreated.’

Incentive/Pressure Opportunities Rationalizations/Attitude
Financial stability/profitability is threatened Significant related party transactions Relationship between management and current/predecessor auditor is strained
Pressure on management to meet the expectations of third party Complex transactions/significant estimates Practice by management of committing to aggressive/unrealistic forecasts
Personal financial situation of management threatened by the entity’s financial performance. Domination of management by single person/small group Known history of violations of security laws/other laws and regulations
Excessive pressure on management or operating personnel to meet the expectations of third parties. Complex or unstable organizational structure Ineffective communication/enforcement of entity’s values or ethical standards by the management
Personal financial obligations Internal control components are deficient Low morale among senior management
Adverse relationships between the entity and employees with access to cash or other assets susceptible to theft. Inventory/assets are small in size and high in value Behavior indicating displeasure/dissatisfaction with the entity
Cash intensive business Changes in behavior or lifestyle
Easily convertible assets (computer chips, diamonds, bearer bonds) Failing to correct known control deficiency. Overriding existing controls

Fraud Triangle

5.3 Fraud Consideration and Risk Management

Fraud consideration in an audit require that the auditor should evaluate the risk of fraud, including the effectiveness of internal controls, and communicate with those charged with governance responsibilities about fraud.

Fraud may be harder to detect than error, because with a fraud the fraudster is actively trying to hide what they have done.

Whose responsibility is it to prevent fraud?

Management and those charged with governance are primarily responsible for preventing and detecting fraud.

How can they do so?

Establish strong control environment and establish a culture of honesty and ethical behavior.

Emphasis within the company on fraud prevention and set up fraud hotlines, reporting procedure and protection. Adopt a zero tolerant policy toward fraud.

Emphasize good corporate governance

Discussion with the engagement team.

The audit team can discuss the following factors:

How fraud can be done?

How to maintain professional skepticism throughout the audit?

Types of circumstances that might indicate fraud.

How unpredictability can be incorporated into audit?

Any allegations of fraud that have come to the auditors notice

The risk of management override of controls.

What audit procedures to be carried out to answer any suspicions of fraud?

2. Fraud Risk Assessment

Fraud risk assessment depends in large part on maintaining professional skepticism when evaluating the reliability of audit evidence obtained and assessing whether a material misstatement due to fraud exists.

The broad goal of fraud risk assessment;

make inquiries of management and others within the organization to obtain their views about the risks of fraud and how they are addressed. This can include employees, TCWG, internal audit department.

Consider any unusual or unexpected relationships that have been identified in performing analytical procedures

Consider whether one or more fraud risk factors exist.

Consider other information that may be helpful in identifying risks of material misstatement due to fraud.

3. Internal Control

The system of internal controls and whether it operates as intended, enables the auditors to gain confidence about the internal processing of transaction.

Auditors should ensure that there is effective internal controls on place.

As part of evaluating the control environment, the auditor should assess whether

Management’s philosophy and operating style promote effective internal control over financial reporting

Sound integrity and ethical values, particularly of top management, are developed and understood.

The board or audit committee understands and exercises oversight responsibility over financial reporting.

5.5 Professional Skepticism

Professional Skepticism plays a fundamentally important role in the audit by facilitating professional judgement, particularly regarding decision about:

The nature, timing and extend of audit procedures to performed to reduce the risk of material misstatement to an appropriate level

Whether sufficient, competent, and relevant evidence has been obtained and whether additional evidence needs to be gathered to support risk analysis

The evaluation of management’s judgement and estimates used in recording transactions and financial statement presentation

Consideration of fraud in the audit

The conclusion reached based on the audit evidence obtained.

Reference

Steven , M. M., & Roselyn, E. M. (2017). Ethical Obligation and Decision Making in Accounting (4 ed.). New York: McGraw- Hill Education.

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