Page 340 - CA Final Audit Titanium Full Book. (With Cover Pages)

CA Ravi Taori
Unacceptable Management Responses: Examples include denial of access to records/facilities/employees,
undue time pressure to resolve complex issues, and unusual delays in providing requested information. There
might also be denial for use of Computer Assisted Audit Techniques or unwillingness to address identified
deficiencies in internal control.
Other Indications: These could involve Accounting Policies that deviate from Industry Norms or frequent
changes in accounting estimates.

The Fraud Diamond
The Fraud Diamond and Its Elements
Wolfe and Hermanson's Theory:
The Fraud Diamond, or the four elements of fraud, was established by David T. Wolfe and Dana R. Hermanson.

Fraud Diamond: Four Elements:
- Incentive: I want to, or have a need to, commit fraud.
- Opportunity: There is a weakness in the system that can be exploited.
- Rationalization: I have convinced myself that this fraudulent behaviour is worth the risks.
- Capability: I have the necessary traits and abilities to recognize and exploit a fraud opportunity.
Responses to Fraud
SA 330 states the auditor’s responses to assessed risks: It requires the auditor to assign and supervise personnel,
taking into account the knowledge, skill, and ability of the individuals.

Auditor's Responsibilities
Evaluate the selection and application of accounting policies: The auditor must evaluate the selection and
application of accounting policies by the entity. This involves assessing how the entity applies its accounting
policies and ensuring that they are appropriate.

Element of Unpredictability
Incorporate an element of unpredictability: This is in the selection of the nature, timing, and extent of audit
procedures to keep the audit process flexible and more effective in detecting issues.

Responses to Management Override Risks
Response to the risks related to management override of controls includes: Testing the appropriateness of
journal entries and other adjustments made in the preparation of the Financial Statements. It also involves
reviewing accounting estimates for biases and examining significant transactions outside the normal course of
business or that appear unusual.

Assessing Fraud Risk Factors
Auditor needs to assess fraud risk factors for material misstatement or misappropriation of assets due to
fraud: This includes looking at incentive/pressures, opportunities, and attitudes/rationalizations that might
lead to fraud.

Communications Regarding Fraud
The responses to fraud will include communications to management and those charged with
governance: This also extends to communication with regulatory and enforcement authorities, along with
appropriate documentation on the auditor’s assessment of the risks of material misstatement.

Factors Affecting Fraud Detection
Auditor’s ability to detect fraud depends on factors such as: These factors include the skillfulness of the

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