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Fraud and illegal acts 4 9 2015

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Fraud and illegal acts 4 9 2015
FRAUD VS. ILLEGAL ACTS

WHAT IS THE AUDITING DEFINITION OF FRAUD
AND ILLEGAL ACTS?

DEFINITIONS

Fraud:
 Fraud is an intentional act that

results in a misstatement in financial statements that are the subject of an audit (AU-C
240.11)

ILLEGAL ACTS:
 Illegal acts, in the context of

auditing, is referred to
Noncompliance.
 Noncompliance is “acts of omission or commission by the entity, either intentional or unintentional, which are contrary to the prevailing laws or regulations,” AU-C 250.11

WHO IS PRIMARILY RESPONSIBLE FOR DETECTION AND
PREVENTION?

Fraud

NONCOMPLIANCE




Governing board of the entity and management is primarily responsible for fraud prevention and detection (AU-C 240.04)



Management is primarily responsible, with the governing board entailed with oversight, of complying with current laws and regulations.
This includes laws and regulations that pertain to the reported amounts and disclosures in an entity’s financial statements (AU-C 250.03)

WHAT ARE THE DIFFERENCES AND
SIMILARITIES BETWEEN FRAUD AND ILLEGAL
ACTS?

DIFFERENCES:

Fraud:
 When an auditor conducts an

audit according to GAAS, the auditor is responsible for providing reasonable assurance that the financial statements are free from material misstatements, whether due to error or fraud. (AU-C 240.05)

ILLEGAL ACTS:
 When an auditor conducts an

audit according to GAAS, “the auditor is not responsible for preventing noncompliance and cannot be expected to detect noncompliance with all laws and regulations” (AU-C 250.04)

SIMILARITIES:

Fraud:

ILLEGAL ACTS:

 Auditor needs to exercise

 Auditor needs to exercise

professional skepticism
 High Risk of not detecting fraud due to inherent limitations:

professional skepticism
 High Risk of not detecting noncompliance due to inherent limitations:  Management fraud is much harder

for an auditor to detect that fraud committed by employees
 Management override of controls or collusion

 Many laws and regulations
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