Auditing & Assurance 101 Practice Test: The Risk of Fraud — Flashcards

Fraud in audit is when a company intentionally misrepresents its financial statements to hide profit or losses, or to manipulate its financial health. It's illegal and can have severe consequences. Here are some examples of fraud in audit:
- Cash misappropriation: This is when someone records cash for personal gain, such as by:
- Not registering cash transactions
- Making fake entries in customer accounts
- Recording purchases that never happened
- Recording amounts that are either more or less than actually paid 

Auditors are responsible for detecting and deterring fraud by: Evaluating accounting systems for weaknesses, Designing and monitoring internal controls, Determining the degree of organizational fraud risk, Interpreting financial data for unusual trends, and Following up on fraud indicators. 

Some fraud risk factors that auditors consider include:
Large amounts of cash or other valuable inventory items on hand, without adequate security measures in place
Heavy dependence on a few key employees, who have too much power and too few checks and balances 

Here are some audit procedures that help in detecting fraud: Having Fraud Brainstorming Session, Performing Journal Entry Testing, Inspecting Accounting Estimates, and Checking for Significant Unusual Transaction.