The goals of this chapter are: Define and describe internal control and explain the limitations of all internal control systems, distinguish between the responsibilities of management and auditors regarding an entity’s internal control, define and describe the five basic components of internal control and specify some of their characteristics,. | Management Fraud and Audit Risk Chapter 04 Management Fraud and Audit Risk “Profit is the result of risks wisely selected” Frederick Barnard Hawley “Risk comes from not knowing what you’re doing” Warren Buffett 4- Learning Objectives Define business risk and understand how management addresses business risk with the Enterprise Risk Management Model Explain auditors’ responsibility for risk assessment and define and explain the differences among several types of fraud and errors that might occur in an organization. Describe the audit risk model and explain the meaning and importance of its components in terms of professional judgment and audit planning Understand sources of inherent risk factors including the client’s business and environment. Understand sources of information for assessing risks including analytical procedures, brainstorming and inquiries. Explain how auditors respond to assessed risks. Explain auditors’ responsibilities with respect to a client’s failure to comply with laws or regulations. Describe the content and purpose of an audit strategy. 4- Auditor’s Risk Responsibilities Audit Risk—auditor will give unqualified opinion on misstated financial statements Management Fraud Risk—management intentionally misstates financial statements Fraudulent financial reporting Errors are unintentional misstatements or omissions of amounts or disclosures in financial statements. Auditors’ primary responsibility is to design procedures to provide reasonable assurance that frauds that materially misstate the financial statements are detected. 4- Management has a motivation to engage in fraudulent reporting. Management decisions are dominated by an individual or a small group. Management fails to display an appropriate attitude about internal control. Managers’ attitudes are very aggressive toward financial reporting. Managers place too much emphasis on earnings projections. Fraud Risk Factors: Management’s Characteristics and Influence 4- . | Management Fraud and Audit Risk Chapter 04 Management Fraud and Audit Risk “Profit is the result of risks wisely selected” Frederick Barnard Hawley “Risk comes from not knowing what you’re doing” Warren Buffett 4- Learning Objectives Define business risk and understand how management addresses business risk with the Enterprise Risk Management Model Explain auditors’ responsibility for risk assessment and define and explain the differences among several types of fraud and errors that might occur in an organization. Describe the audit risk model and explain the meaning and importance of its components in terms of professional judgment and audit planning Understand sources of inherent risk factors including the client’s business and environment. Understand sources of information for assessing risks including analytical procedures, brainstorming and inquiries. Explain how auditors respond to assessed risks. Explain auditors’ responsibilities with respect to a client’s failure to .
