Rice Business Report September 2019 September 2019 Rice Business Report

Rice Business Report September 2019 Continued from page 7….. Fraud Detection and Prevention in Financial Reporting - Is It the Auditors' Responsibility? By Desmond Aidoo Although fraud is a broad legal concept, the auditor is concerned with fraudulent acts that cause a mate- rial misstatement in the financial statements and there are two types of misstatements in the considera- tion of fraud - misstatements resulting from fraudulent financial reporting and those arising from misap- propriation of assets. (par. 3 of ISA 240) Misappropriation of assets involves the theft of an entity's assets and can be accomplished in a variety of ways (including embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not received). It is often accompanied by false or misleading records or documents in order to conceal the fact that the assets are missing. Individuals might be motivated to misappropriate assets, for example, because the individuals are living beyond their means. Fraudulent financial reporting may be committed because management is under pressure, from sources outside and inside the entity, to achieve an expected (and perhaps unrealistic) earnings target - particu- larly since the consequences to management of failing to meet financial goals can be significant. It in- volves intentional misstatements, or omissions of amounts or disclosures in financial statements to de- ceive financial statement users. Fraudulent financial reporting may be accomplished through i. Deception i.e. manipulating, falsifying, or altering of accounting records or supporting documents from which the financial statements are prepared. ii. Misrepresentation in, or intentional omission from, the financial statements of events, transactions, or other significant information. iii. Intentionally misapplying accounting principles with regards to measurement, recognition, classification, presentation, or disclosure. The case of Auditors' in Fraud Detection and Prevention in Financial Reporting Auditors maintain that an audit does not guarantee that all material misstatements will be detected due to the inherent limitation of an audit and that they can obtain only reasonable assurance that material mis- statements in the financial statements will be detected. It is also known that the risk of not detecting a ma- terial misstatement due to fraud is higher than that of not detecting misstatements resulting from error be- cause fraud may involve sophisticated and carefully organized schemes designed to conceal it, such as for- gery, deliberate failure to record transactions, or intentional misrepresentations being made to the auditor Continued on page 9….. 8

Rice Business Report September 2019 September 2019 Rice Business Report | Page 8