Outline of Auditor's Responsibility for Fraud

SAS 82 says an auditor has a responsibility “to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud.”

SAS 99 clarifies the steps an auditor must perform in their evaluation of fraud in the financial statements.

The “Fraud Triangle” consists of the following three components:

• Incentive / Pressure
• Opportunity
• Attitude / Rationalization

SAS 99 identifies the following two types of fraud:

• Fraudulent Financial Reporting (“Cooking the Books”)
• Misappropriation of Assets

The following are risk factors related to Fraudulent Financial Reporting:

• Incentive / Pressure Related
  • Excessive pressure on management to meet earnings expectations
• Opportunity Related
  • Inadequate monitoring of internal controls
  • Significant accounting estimates involving subjective judgments
• Attitude / Rationalizations Related
  • Management attempts to justify marginal or inappropriate accounting practices.

The following are risk factors related to Misappropriation of Assets:

• Incentive / Pressure Related
  • Adverse relationship between entity and employees
• Opportunity Related
  • High value, small size, high demand inventory
• Attitude / Rationalizations Related
  • Disregard for monitoring and controls

SAS 99 Process for Identifying Risks of Material Misstatements Due to Fraud:
1. Gather relevant information:

• Brainstorming among audit team
• Inquiries
• Risk factors
• Analytical procedures
• Acceptance and retention policies
• Other sources of information

2. Evaluate the gathered information

• Type
• Significance
• Likelihood
• Pervasiveness

SAS 99 Audit Committee and Management Inquires Regarding Fraud:
1) Are there concerns of material fraud?
2) Is there any knowledge of fraud occurrences presently or in the recent past?
3) How are you, as the audit committee, addressing fraud occurrences and/or the potential for fraud occurrences?

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