NIRMALA NOTES

• What is one method of obtaining something illegally from someone?

  Physically force someone
• What is fraud characterized by?

  Deception and trickery
• What is a method of concealing fraud?

  Falsification of documents
• What does the destruction of documentation refer to in fraud concealment?

  Shredding important documents
• What is off-book fraud?

  Misrepresentation of realities
• How does fraud concealment affect financial statements?

  It misstates the financial statements
• What are the two types of misstatements in fraud concealment?

  Omission and commission
• What distinguishes fraud from error?

  Fraud is intentional misstatement
• What is fraudulent financial reporting?

  Manipulation of accounting records
• What is misappropriation of assets?

  Theft of assets
• What are errors in accounting?

  Unintentional misstatements
• What can cause unreasonable accounting estimates?

  Oversights of facts
• Who is responsible for detecting fraud and error?

  Both management and auditor
• What is a key responsibility of management regarding fraud?

  Installing an effective accounting system
• What is an auditor's role in fraud detection?

  Assess risk and design audit procedures
• What are red flags indicating high risk of fraud?

  Poor internal controls
• What management characteristic increases fraud risk?

  Dominated by one person
• What should auditors do if they suspect fraud?

  Report to management or board
• What is the Fraud Diamond?

  Model for understanding fraud factors

  
• What does 'incentives/pressure' refer to in the Fraud Diamond?

  Causes for committing fraud

  
• What does 'opportunities' mean in the context of fraud?

  Conditions enabling fraud to occur
• What is 'attitude/rationalization' in the Fraud Diamond?

  Reconciling behavior with decency
• What does 'capability' refer to in the Fraud Diamond?

  Ability to exploit fraud opportunities

  
• What is the audit expectation gap?

  Difference between public expectations and auditor responsibilities
• What can cause the audit expectation gap?

  Unrealistic expectations from users
• What are the implications of the audit expectation gap?

  Loss of confidence in auditors
• What actions can narrow the audit expectation gap?

  Expanded audit reports
• Why is there an increase in legal action against auditors?

  Lack of understanding of audit failures
• What is the difference between business failure and audit failure?

  Business failure is financial inability
• What is audit risk?

  Risk of issuing an incorrect audit opinion
• What measures can reduce exposure to lawsuits at the profession level?

  Establish stronger auditing standards
• What is the auditor's liability under common law?

  Liability to clients and third parties
• What must a plaintiff prove to bring legal action against auditors?

  Duty of care was owed
• What is breach of contract in relation to auditors?

  Failure to complete agreed services
• What is negligence in auditing?

  Failure to act with due care
• What must a client prove in a liability case?

  Causal connection between negligence and damage
• What is the auditor's defense against liability claims?

  No duty was owed to the client
• What is the auditor's liability to third parties?

  Negligence and fraud liability
• What must a third party prove in a liability case?

  Auditor breached duty of care
• What is statutory law in relation to auditors?

  Legal reporting liabilities imposed by statutes