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Detecting fraud
Gerald Chau and Yu How-yuen highlight the procedures
outlined in HKSA 240 (Clarified) on auditing financial statements
February 2010
Pressure or incentive
Management or other employees may
have an incentive or be under pressure to
Hold discussions among
commit fraud. This might include excessive
audit team members
pressure to meet the expectations of
To fulfil their responsibility for detecting fraud, investors, lenders and financial analysts
auditors should hold discussions within
or personal financial obligations.
the audit team as required by paragraph 15
of HKSA 240 (Clarified), which states that
Opportunity
discussions should include an exchange of
Circumstances provide opportunities for
ideas about: (1) how the entitys financial
management or employees to commit
statements might be susceptible to material
fraud, which may include domination by
misstatement due to fraud, (2) how the fraud a single person or a small group in a
could be perpetrated and concealed, and
family-owned business, the ability of
(3) the audit procedures including additional management to override controls, or
or alternative ones that might be selected
inadequate internal controls.
to respond to the susceptibility of material
misstatements due to fraud.
Rationalization
There should also be discussions about
An attitude, a character or set of ethical
the risk of management overriding controls
values exists that allows management or
resulting in fraudulent financial reporting,
employees to commit dishonest acts such
setting aside any previously held views about
as the need to protect the shareholders and
managements integrity.
keep the stock price high.
A PLUS
43
Auditing
A PLUS
February 2010