Fraud and Error in ACCA Advanced Audit and Assurance

What this chapter covers

Fraud and error: topics in the order to study them

1. 1Fraud vs Error: Definitions and Types of FraudStart here because every later point depends on knowing what fraud is and how it differs from error.
2. 2Fraud Risk Factors and the Fraud TriangleNext you learn why fraud occurs, which lets you spot risks in scenarios before you learn the audit response.
3. 3Responsibilities of Management, Those Charged with Governance and AuditorsYou need to separate who prevents and detects fraud from what the auditor must do, before studying procedures.
4. 4Auditor's Risk Assessment and Response to Fraud RisksThis is the most heavily tested part, and it builds on the risk factors and responsibilities you have just covered.
5. 5Communication, Reporting and Ethical Implications of FraudFinish with what happens after fraud is suspected or found, which draws on all earlier topics and on ethics.

How to prepare Fraud and error

1. Learn the definitions and the two types of fraud in your own words, with one example of each.
2. Memorise the fraud triangle and practise sorting scenario facts into incentive or pressure, opportunity and rationalisation.
3. Write a short list of auditor responsibilities and a separate list for management and those charged with governance, so you do not mix them up.
4. Learn the risk assessment steps: professional scepticism, team discussion, enquiries, analytical procedures and presumed risks such as revenue recognition and management override.
5. Build response lists at three levels: overall, specific procedures, and unpredictable procedures. Include journal entry testing, estimates review and unusual transactions.
6. Practise past scenario questions. Write each answer with a point, a scenario fact and a reason, and check professional skills.
7. Finish by drafting a short reporting answer: who to tell, what to say, confidentiality, and when disclosure outside the client may be needed.

Common mistakes in Fraud and error

• Listing fraud procedures generically without using the scenario.

  Fix: Pick only procedures that fit the risk in the case. State the scenario fact, the risk, then the procedure.

• Saying the auditor is responsible for preventing fraud.

  Fix: Say management and those charged with governance prevent and detect. The auditor assesses risk and obtains reasonable assurance.

• Treating fraud and error the same way.

  Fix: Always state intent first. Explain that fraud brings concealment, collusion and a more serious response.

• Naming the fraud triangle elements without applying them.

  Fix: Link each element to a fact, such as a bonus target for pressure or weak controls for opportunity.

• Ignoring ethics and reporting when fraud is found.

  Fix: Add communication to those charged with governance, confidentiality, legal advice, and consideration of reporting to authorities or withdrawal.

• Forgetting professional scepticism and commercial judgement in the answer.

  Fix: Challenge management explanations, comment on the commercial reasons for the risk and write in a clear, structured way to earn professional skills marks.

Last-day revision: Fraud and error

• ✓Fraud is intentional. Error is unintentional.
• ✓Two types of fraud: fraudulent financial reporting and misappropriation of assets.
• ✓Fraud triangle: incentive or pressure, opportunity, rationalisation.
• ✓Management and those charged with governance are responsible for preventing and detecting fraud.
• ✓The auditor obtains reasonable assurance, not a guarantee that fraud is found.
• ✓Fraud risk is higher where there is collusion or concealment, so detection is harder than for error.
• ✓Maintain professional scepticism throughout the audit.
• ✓Hold a team discussion on how and where the financial statements may be misstated by fraud.
• ✓Revenue recognition is presumed to be a fraud risk, and management override of controls is always a risk.
• ✓Respond with journal entry testing, review of estimates for bias, and understanding the business rationale of unusual transactions.
• ✓Add an element of unpredictability to procedures.
• ✓Communicate fraud to management and those charged with governance on a timely basis, and consider legal and ethical duties on confidentiality and reporting.

Fraud and error practice questions

• In the audit of Brightwater Foods, the engagement team discusses where the financial statements might be susceptible to fraud. Which approac…
• During planning for Kestrel Co, the audit senior proposes that, because the directors are long-standing and trusted, discussion of fraud ris…
• While auditing Brightwell Pharma, the auditor finds that a significant sale was recorded on terms differing from the contract, and managemen…
• Kestrel Logistics has a long-serving financial controller who has never taken a holiday of more than two days, has sole access to the bank r…
• During planning of the audit of Kestrel Retail Ltd, the engagement team discusses where the financial statements might be susceptible to mat…
• Auditor Mensah is assessing fraud risk at Orchid Retail. Under ISA 240, which presumption must she apply unless she can rebut it?
• Auditor Kiran is auditing Orion Ltd and finds that the chief executive probably inflated revenue through false invoices. Kiran must decide w…
• Karim & Co audits Zenith Ltd, where the chief executive also acts as chair, controls all board decisions, and the finance team has no indepe…

Fraud and error in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

• ACCA Applied SkillsFraud, laws and regulations
• CS ProfessionalBasic Concepts of Forensic Audit
• CMA FinalForensic Audit
• FRM Part IICase Study: Financial Crime and Fraud