Abstract:
The 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. The primary
factor that distinguishes fraud from error is whether the underlying action
that results in the misstatement of the financial statements is intentional or
unintentional. Three conditions generally are present when fraud occurs.
First, management or other employees have an incentive or are under
pressure, which provides a reason to commit fraud. Second, circumstances
exist-for example, the absence of controls, or the ability of management to
override controls-that provide an opportunity for a fraud to be perpetrated.
Third, those involved are able to rationalize committing a fraudulent act.
Some individuals possess an attitude, character, or set of ethical values that
allow them to knowingly and intentionally commit a dishonest act. However,
even otherwise honest individuals can commit fraud in an environment that
imposes sufficient pressure on them. The auditor should perform a few
procedures to obtain information that is used to identify the risks of material
misstatement due to fraud. Because fraud is usually concealed, material
misstatements due to fraud are difficult to detect. Nevertheless, the auditor
may identify events or conditions that indicate incentives/pressures to
perpetrate fraud, opportunities to carry out the fraud, or
attitudes/rationalizations to justify a fraudulent action. Such events or
conditions are referred to as "fraud risk factors." Fraud risk factors do not
necessarily indicate the existence of fraud, but, they often are present in
circumstances where fraud exists.
