Question

1. Define and explain the differences among several kinds of employee frauds that might occur at an audit client.

1a.Identify and explain the three conditions (i.e., the fraud triangle) that often exist when a fraud occurs.

1b. Identify the relevant assertions and risks of material misstatement that are typically related to the cash balance.

1c. Give examples of substantive procedures used to test cash and relate them to the relevant assertions.

Answer 1

1 a): Element of Fraud triangle refers to the pressure, opportunities, and rationalization where it is identified that what pressured someone to commit fraud, what opportunities are available for someone to perpetrate the fraud so long, and finally how someone try to rationalized his behave after committing any fraud. All of these elements are associated with each other because it is important to understand how and why fraud is committed by someone, and what opportunities are available for someone in order to commit any fraud in order to control and monitor the fraud on timely basis to prevent general public interest. Proper regulatory bodies must be in place to reduce the level of opportunity in committing any fraud.

1 b): In relation to cash balance, there are various assertions based on which we can rely on the cash balance of financial statement. These assertions are existence, accuracy, completeness, and proper cutoff. These assertions helps to identify the risk of material misstatement in cash by applying the control test. However, there are some inherent risk as well that also affect the risk of material misstatement. Therefore, it should be properly monitored and assessed timely to control and prevent it by test controls and applying substantive procedure.

1 c): In order to control and prevent the material misstatement of cash, substantive procedure should also be adopted and it will also help to assess the risk of misstatement in cash. We can control the risk by applying the substantive procedure as follow:

i) Balance Confirmation: We can confirm the balance in order to check and maintain control over the balance on random basis. Even, we can demand for external balance confirmation from bank as well to verify the bank balance to verify the balance and to assured the existence of cash.

ii) Bank Reconciliation: We can check the bank reconciliation of particular months to verify the bank bank balance with the actual and available cash in hand.

iii) Verify the Deposit and Payments at proper intervals: It should also be checked whether all the deposits and payments are recorded at proper intervals and cutoffs. This will affect the actual position of cash of the company so it should also be properly accounted for.