Page 22 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
Objective:
The objectives of the auditor in accordance with SA 240 are: -
a) To identify and assess the risks of material misstatement in the financial statements due to fraud.
b) To obtain sufficient appropriate audit evidence about the assessed risks of material misstatement due to fraud,
through designing and implementing appropriate responses; and
c) To respond appropriately to identified or suspected fraud.

(CNO-SA240.040) Meaning of Fraud and Its Characteristics
Definition: Fraud is an intentional act involving deception to gain an unjust or illegal advantage. It can be
committed by individuals among management, governance, employees, or third parties. Misstatements in
financial statements can arise from fraud or error. Fraud is intentional, while error is unintentional.
Material Misstatement: Auditors are primarily concerned with fraud that causes a material misstatement in the
financial statements.
Types: There are two types of intentional misstatements relevant to auditors:
a) Fraudulent financial reporting
b) Misappropriation of assets
3 Reasons: Fraud may involve 3 reasons – incentive or pressure to commit fraud, a perceived opportunity,
rationalization of the act.
Incentive/Pressure: Management may face external or internal pressures to meet unrealistic financial targets,
leading to fraudulent financial reporting. Similarly, individuals living beyond their means may be incentivized
to misappropriate assets.
Opportunity: Fraud can occur when individuals perceive they can override internal controls, often due to their
position of trust or knowledge of specific control deficiencies.
Attitude/Rationalization: Individuals may justify fraudulent acts due to their personal attitudes, ethical values,
or character. Even honest individuals can commit fraud under an environment that imposes sufficient pressure
on them

(CNO-SA240.060) How Fraudulent Financial Reporting may be caused by entities?
Definition: Fraudulent financial reporting involves intentional misstatements and omissions in financial
statements to deceive users.
Minor Changes to FFR: Due to various pressures and incentives, management may engage in earnings
management, starting with minor changes to assumptions and escalating to fraudulent financial reporting. This
manipulation, driven by the desire to meet market expectations, maximize compensation, minimize tax, or
secure financing, can mislead users about the entity's true financial performance and profitability.
Fraudulent financial reporting may be accomplished by the following (Shortcut-OMR)
Omission or Misrepresentation: Entails intentional omission or misrepresentation of events, transactions, or
other significant information in the financial statements.
Misapplication of accounting principles: Refers to the deliberate misapplication of accounting principles,
affecting amounts, classification, presentation, or disclosure.
Record Tampering: Involves manipulation, falsification, or alteration of accounting records or supporting
documentation used in preparing financial statements.
Techniques of Management Override in Fraudulent Financial Reporting (Nalayak uses Fraud CART)
Non-disclosing Facts: Concealing or failing to disclose facts that could affect the amounts recorded in the
financial statements is another method.
Fictitious journal entries: Management may record fictitious journal entries, especially near the end of an
accounting period, to manipulate results or achieve specific objectives.

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