Page 27 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
(Shortcut-LIC)
o Known or anticipated future employee Layoffs.
o Promotions, compensation, or other rewards Inconsistent with expectations
o Recent or anticipated Changes to employee compensation or benefit plans

(CNO-SA 240.240) Examples of fraud risk factors: Misappropriation of assets- Attitudes/Rationalizations.
(Shortcut: D TL)
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Disregard for Risk: Disregard for the need for monitoring or reducing risks related to misappropriations of
assets.
Disregard for Internal Control: Disregard for internal control over misappropriation of assets by overriding
existing controls or failing to take remedial action on known control deficiencies.
Dissatisfaction: Behaviour indicating displeasure or dissatisfaction with the entity or its treatment of the
employee.
Theft Tolerance: Tolerance of petty theft.
Lifestyle Changes: Changes in behaviour or lifestyle that may indicate assets have been misappropriated.

(CNO-SA240.260) Examples of fraud risk factors: Misappropriation of assets- Opportunities.

Certain characteristics or circumstances may increase the susceptibility of assets to misappropriation. For
example, opportunities to misappropriate assets increase when there are the following: -
▪ Fixed assets: Fixed assets which are small in size, marketable, or lacking observable identification of
ownership.
▪ Investments: Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
▪ Inventory: Inventory items that are small in size, of high value, or in high demand.
▪ Cash: Large amounts of cash on hand

"Potential Weaknesses in Internal Control Systems Leading to Asset Misappropriation"
(Shortcut: S MART)
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Segregation of duties: Inadequate segregation of duties, lack of independent checks.
Safeguarding: Insufficient physical safeguards over cash, investments, inventory, or fixed assets, and lack of
timely reconciliations and documentation of transactions can lead to asset misappropriation.
Management oversight: Poor management oversight of employees, especially in remote locations, and
inadequate screening of job applicants with access to assets increase susceptibility to asset misappropriation.
Authorization: Weak systems of transaction authorization and approval, particularly in purchasing, and
Record keeping: Inadequate record keeping related to assets can facilitate misappropriation.
Technology: Inadequate management understanding of information technology and poor access controls over
automated records, including review of computer systems event logs, can enable misappropriation of assets.

(CNO-SA240.280) Why evaluation of Fraud Risk Factors (FRF) by auditor is necessary?
1A. Responsibility: The auditor is responsible for assessing the presence of one or more fraud risk factors.
1B. Helps in identifying Fraud risk: The determination of whether a fraud risk factor is present and its
consideration in assessing the risks of material misstatement due to fraud requires professional judgment.
2A. May Not Lead to Fraud: Fraud risk factors may not directly signify fraud, but their presence often indicates
potential risks of material misstatement due to fraud.
2B. Not necessarily RMM: Some fraud risk factors may exist in entities without necessarily presenting risks of
material misstatement.
3A. Difficult to Conceal: Fraud is typically concealed, making it challenging to detect. However, auditors may
still identify fraud risk factors.

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