Page 23 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
Complex Transactions: Engaging in complex transactions structured to misrepresent the entity's financial
position or performance.
Adjustments to assumptions: Inappropriate adjustments to assumptions and changes in judgments used to
estimate account balances can be made.
Record Alteration: Records and terms related to significant and unusual transactions may be altered to
misrepresent financial information.
Timing adjustments: Events and transactions that occurred during the reporting period may be omitted,
advanced, or delayed in their recognition in the financial statements.

(CNO-SA240.080) How misappropriation of assets may be accomplished by entities?
Definition: Misappropriation of assets involve theft of an entity’s assets and is often perpetrated by employees
in relatively small and immaterial amounts.
1A. Theft: This includes stealing physical assets or intellectual property, for example, taking inventory for
personal use or sale, reselling scrap, or disclosing technological data to competitors for payment.
1B. Unauthorized Use: Misappropriation can involve using the entity's assets for personal use, such as using the
entity's assets as collateral for a personal loan or a loan to a related party.
2A. Receipts Embezzlement: Misappropriation of assets can involve embezzling receipts (Killing Trust), such
as misappropriating collections on accounts receivable or diverting receipts from written-off accounts to personal
bank accounts.
2B. Fraudulent Payments: Misappropriation can also involve causing the entity to pay for goods and services
not received.
This could include payments to fictitious vendors, kickbacks from vendors to purchasing agents for inflated
prices, or payments to non-existent employees.
3A. Concealing: Misappropriation is often accompanied by false or misleading records or documents to conceal
the fact that assets are missing or have been pledged without proper authorization.
3B. Auditor's Role: The auditor may suspect or identify potential fraud but does not make legal determinations
of whether fraud has occurred.

(CNO-SA240.100) Whose primary responsibility is to prevent and detect fraud?
Responsibility & Oversight: Both management and Those Charged with Governance (TCWG) have the
primary responsibility for fraud prevention and detection, with an emphasis on creating a culture of honesty and
ethical behaviour, overseen actively by TCWG.
Prevention & Deterrence: Management should concentrate on fraud prevention to reduce opportunities and
on fraud deterrence to discourage fraudulent actions due to the potential for detection and punishment.

(CNO-SA240.120) Responsibilities of the Auditor.
1A. Audit Responsibility: Auditors are responsible for obtaining reasonable assurance that financial statements
are free from material misstatement, whether caused by fraud or error, in accordance with Standard Auditing
(SAs).
1B. Professional Skepticism: Auditors must maintain professional skepticism throughout the audit,
considering the potential for management override of controls and recognizing that procedures effective for
detecting error may not be effective in detecting fraud.
(Shortcut- (Intelligent Frauds by CM & JP)
Inherent Limitations: Despite proper planning and execution, audits have inherent limitations that may lead
to undetected material misstatements in financial statements.
Fraud Identification: The risk of not detecting a material misstatement resulting from fraud is higher than one
resulting from error due to the sophistication and organization of fraudulent schemes.

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