Question

if auditors and investigators modified their typical procedures and regularly used a few unexpected procedures to look for fraud, how would this affect a potential perpetrator’s opportunity to conceal a fraud?

Answer 1

Fraud is a broad legal concept and auditors do not make legal determinations of whether fraud has occurred. Rather, the auditor's interest specifically relates to acts that result in a material misstatement of the financial statements.

The primary factor that distinguishes fraud from error is whether the underlying action that results in the misstatement of the financial statements is intentional or unintentional. For purposes of the section,

fraud is an intentional act that results in a material misstatement in financial statements that are the subject of an audit.4

.06Two types of misstatements are relevant to the auditor's consideration of fraud—misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.

Misstatements arising from fraudulent financial reporting are intentional misstatements or omissions of amounts or disclosures in financial statements designed to deceive

financial statement users where the effect causes the financial statements not to be presented, in all material respects, in conformity with generally accepted accounting principles (GAAP).5Fraudulent financial reporting may be accomplished by the following:

Manipulation, falsification, or alteration of accounting records or supporting documents from which financial statements are prepared

Misrepresentation in or intentional omission from the financial statements of events, transactions, or other significant information

Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure