Financial Reporting Fraud Risk Statement

The new fraud audit standards require you to incorporate a “deeper understanding” of potential fraud schemes into your audit planning and execution. Over the past two months we have focused on what this means when considering asset misappropriation. Over the next few months, we will focus on financial reporting.

How does financial reporting fraud differ from asset misappropriation?

At the most basic level, asset misappropriation involves the theft of assets, while financial statement reporting focuses on whether financial statements are fairly presented in accordance with the applicable financial reporting framework. Audits of financial statements must be in compliance with applicable auditing standards. In this blog, we are discussing looking for intentional misrepresentation of financial statements.

In order to build our fraud risk model, we must remember that the fraud risk spectrum starts from the main categories. The three categories discussed in most of the literature are asset misappropriation, financial reporting, and corruption. Within each primary category there are secondary categories, fraud risk statements and fraud scenarios. Fraud risk statements in each major category share the same five elements: perpetrator, entity, action, impact and financial transition. So, what's the difference? The importance of each element within each major category varies. However, I learned that each major category has unique nuances. Let me illustrate with an example:

In a corruption conspiracy, this entity is also the person who carries out the conspiracy. All corruption schemes involve collusion.

In a financial report, the statement of action has multiple parts, whereas in an asset misappropriation scheme, the statement of action usually has only one part.

Last month, we discussed the ghost employee program . The action statement has a section: Pay for unperformed services.

Identifying Financial Reporting Fraud Risk Statements

When building a fraud risk statement, you must be able to describe the following elements:

1. Misdirection: In financial reporting, an error may be an overstatement of an account balance or an understatement of an account balance.
2. General ledger accounts: General ledger accounts that contain fraud risk statements.
3. Where transactions are recorded: Fraudulent transactions are recorded in the source journal or general journal.
4. Transactions based on false transactions or real transactions. false entity of real entity
5. GAAP Considerations: Remember, fraud in financial statements is intentional error in GAAP. Whether the error is based on GAAP or specific FASB or International IFRS fundamentals.

Financial Reporting Fraud Risk Statement Explanation

Controllers deliberately inflate assets by recording true operating conditions
Expenses incurred from real suppliers through the purchase journal are
Capitalized expenditures resulting in capitalized advertising expenditures
There is a material misstatement.

or

Controllers deliberately exaggerate assets by recording real advertisements
Expenses incurred by real suppliers are recorded through the purchase journal as
Capitalized expenditures resulting in capitalized advertising expenditures
Material misstatement under ASC 340-20. (Refers to U.S. GAAP Capitalized Advertising Expense Guidelines)

Next, connect your risk model to financial statement assertions

Management makes implicit or explicit assertions that the financial statements fully comply with the applicable financial reporting framework Regarding the recognition, measurement, presentation and disclosure of various elements of financial statements and related disclosures. These assertions can be divided into the following categories:

• exist or occur—A company's assets or liabilities exist on a given date and recorded transactions occurred during a given period.
• integrity—All transactions and accounts that should be reported in financial statements are included.
• valuation or allocation——The assets, liabilities, equity, revenue and expense components have been included in the financial statements in appropriate amounts.
• rights and obligations—The rights of a company to hold or control assets; liabilities are the company's obligations on a given date.
• Presentation and disclosure—The components of the financial statements have been correctly classified, described and disclosed.

When you connect the previous fraud risk statement to the financial assertions, you realize that the fraud risk statement allows management to violate the financial statement's existence and valuation assertions.

Your obligation is to “understand more deeply” how financial statements may be materially misleading.

We assume that capitalized advertising costs are a significant account balance on the financial statements. You have to ask yourself the following question: Do you understand how management grossly misstated capital advertising costs and concealed the facts in the audit? Is your audit plan designed to detect such material misstatements? Does your audit team fully understand how to evaluate such errors? Do you really have a better understanding of fraud risks?

Scam trivia

Topic: Dr. Donald Cressey

1. How many books did he publish on criminology?

2. In what year did he coin the term “Fraud Triangle”.

3. Other people’s money: A social psychological study of corruption. What year was it published?

4. Dr. Cressey has had three careers: Can you name them?
5. What was the focus of most of his writings?