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FraudManagement’s Responsibility

Auditor’s Consideration

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Management’s Responsibility

To design and implement programs and controls

that prevent, deter and/or detect

FRAUD

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Auditor’sConsideration

When and how does the auditorlook for fraud indicators?

Statement on Auditing Standards Number 99(Codification AU §316)

(Guidelines for Management)

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We will cover the auditor’s considerations first

Sets the tone for the audit

Readily available guidelines

Directs management’s behavior

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What is fraud?

An intentional act that results in a material misstatement in the financial statements that are the subject of an audit. (Note: Fraud is a legal concept; auditors do not make legal determinations.)

(Note: the auditor should plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement – intentional or unintentional.)

Two types fraudulent financial reporting misappropriation of assets

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What is fraud? (cont’d)

Fraudulent reporting may result from: a misstatement or omission of amounts or

disclosures designed to deceive FS users because GAAP was not followed

an indefensible interpretation of complex accounting rules

temporary misstatements expected to be corrected later

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What is fraud? (cont’d)

Misappropriation of assets (theft or defalcation) may involve a theft resulting in non-GAAP, such as embezzling receipts, stealing assets, causing payment for goods or services not received

This section is only concerned with those misappropriations that cause the FS not to be fairly presented, in all material resects, in conformity with GAAP

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What is fraud? (cont’d)

Conditions usually present when fraud occurs:

incentive or pressure opportunity due to weak controls ability to rationalize following

questionable ethical values

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What is fraud? (cont’d)

Other considerations: Management has a unique ability to

perpetuate fraud by overriding controls. Fraud may be concealed by withholding

evidence, misrepresenting information in response to inquiries, or falsifying documentation.

Fraud may be concealed through collusion.

Some evidence may look like fraud when in fact it results from unexpected or unusual conditions.

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What is fraud? (cont’d)

Keys for school personnel and auditors: Consider where incentives and

opportunities for fraud exist Design controls to prevent or detect it.

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Audit engagement personnel discussions re: fraud risk

Engagement personnel should “brainstorm” how and where FSs are susceptible to material

misstatement due to fraud how management could perpetrate and conceal

fraudulent financial reporting how assets could be misappropriated

Consider incentive, opportunity, and environment (attitudes and rationaliza-tions).

Communication about the possibility of fraud should continue throughout the audit. (Professional Skepticism)

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Obtaining info identifying risks of material misstatement due to fraud

Make inquiries of management and others about their views of the risk of fraud and how the risks are addressed.

Consider unusual or unexpected relationships in performing analytical procedures in planning the audit.

Consider the existence of one or more fraud risk factors.

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Obtaining info re risks (cont’d) -- Inquiries

Inquiries of management about: knowledge of fraud or suspected fraud, allegations

of fraud, understanding of risks of fraud, anti-fraud programs and controls, monitoring at campuses, views on ethical behavior.

reports to the audit committee re fraud Inquiries of the audit committee about

exercise of oversight in mitigation of fraud risks

Inquiries of the internal audit personnel about: views of the risk of fraud, procedures to detect

fraud, and management’s responses

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Obtaining info re risks (cont’d) -- Inquiries

Inquiries of others Federal programs coordinator, Special

education director, State comp ed director Student attendance accounting personnel PEIMS coordinator Principals, campus secretaries, bookkeepers,

etc. Transportation and plant maintenance

personnel Legal counsel Food service personnel

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Obtaining info re risks (cont’d) – Analytical Procedures

Consider using FEISTIER Consider trends and interim

measurements enrollment property values employment in the area AEIS scores federal grants

Consider academic standing TAKS Scores Dropout rate

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Obtaining info re risks (cont’d) – Risk Factors and Other Information

Incentive pressure Administrative cost ratio DIP/CIP TAKS, Special Education, At Risk 85% rules

Opportunity Goal congruency

Attitude/rationalizations Aggressive accounting interpretation Interim measures or scores adjust

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Identifying risks that may result in material misstatement due to fraud

With each risk identified, consider: the type – i.e. fraudulent reporting vs.

misappropriation of assets its significance – i.e. magnitude the likelihood it will result in material

misstatement in the financial statements whether it is pervasive or specifically related to

an account or type of transaction Presume that improper revenue

recognition is a fraud risk Consider the risk of management override

of controls

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Assessing risks in re evaluation of entity’s programs and controls

Understand the five components of internal control of the client’s system.

Identify types of potential misstatements and consider factors that affect the risk of material misstatement.

Design tests of controls and substantive tests.

Consider that controls can be circumvented by collusion or management override.

Evaluate whether client’s controls address identified risks and are in operation.

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Responding to the results of the assessment

Are additional or different audit procedures needed?

Is additional corroborating evidence needed?

If additional procedures designed to address the risks of material misstatement due to fraud are not practicable, consider withdrawing from the engagement with communication to appropriate parties.

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Responding to the results of the assessment (cont’d)

Overall response to the risk of material misstatement: assignment of personnel and

supervision (IT personnel, special education consultants, etc.)

accounting principles (federal programs, state funding, attendance records, etc.)

predictability of auditing procedures

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Responding to the results of the assessment (cont’d)

Nature, timing, and extend of procedures to address the identified risks from fraudulent financial reporting

Additional examples of responses to identified risks of misstatement revenue recognition tests activity fund tests inventory tests administrative actions such as “at risk”

designations, ARD results, attendance accounting

Risks for misappropriations of assets

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Responding to the results of the assessment (cont’d)

Consider the risk of management override of controls regular entries, adjusting entries, consolidating

entries, closing entries adjustments directly to the financial

statements Controls over automated entries

Evaluate the rationale for significant unusual transactions.

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Evaluating Audit Evidence

Assessing risks of material misstatement due to fraud throughout the audit

discrepancies in accounting records conflicting or missing evidential matter problematic or unusual relationships between

the auditor and management

Evaluating whether analytical procedures (substantive tests or overall review) indicate previously unrecognized risk of material misstatement due to fraud

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Evaluating Audit Evidence (cont’d)

Evaluating risks at or near completion of fieldwork

Responding to misstatements that may be the result of fraud Not material – evaluate the implications,

especially those dealing with the organizational position of those involved

Material – gather more evidence, extend the engagement scope, suggest conference with legal counsel

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Communicating about fraud to mgmt, audit committee, and others

Communicate findings to appropriate level of management, even if inconsequential.

If senior management is involved, report to the audit committee.

When the risks involve continuing controls, consider whether they are reportable conditions that should be communicated to senior management and the audit committee.

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Communicating about fraud to mgmt, aud com, and others (cont’d)

The auditor may report to parties outside the school district when: related to compliance with certain legal

or regulatory requirements to successor auditor due to subpoena required by a funding agency

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Documenting the auditor’s consideration of fraud

Documentation of discussion among engagement personnel

Procedures performed to obtain information necessary to identify and assess the risks of material misstatement due to fraud

Specific risks identified If improper recognition of revenue has not been

identified, support for the auditor’s conclusions Considerations of management overrides Reasons for additional procedures or other

responses The nature of communications about fraud made

to management, the audit committee, and others

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Part of the Overall Audit Process

Integrated in the planning and supervision considerations

Considered when determining audit risk and setting

materiality thresholds evaluating internal controls

Management’s responsibility

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Management’s Responsibility

Considering the Potential for Fraud

Designing and ImplementingPrograms and Controls

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Considering the Potential for Fraud

Financial statement misstatements Revenues – attendance, taxes, grants Expenses – supplies, payroll, consulting,

equipment, travel Fund balances – adjustments, evaluation

Misappropriation of assets Cash disbursements Cash receipts Equipment Reimbursements

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Designing/ImplementingPrograms/Controls

Control environment Ethics seminars Other training

Risk assessment Special review of the auditor Reviews by TEA

Control activities Organizational structure (segregation of

duties) Performance reviews Information processing

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Designing/ImplementingPrograms/Controls

Information and communication Financial accounting system PEIMS Student accounting system Other systems Documentation

Monitoring Periodic management reviews Audit TEA reviews