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The three conditions generally present when fraud occurs include:
Motivation to commit fraud is typically one of the elements present when fraud occurs. Internal control is a system used to help prevent fraud. Management oversight is an element of internal control.
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According to AU 316; “Management has a unique ability to perpetrate fraud because”
AU 316 indicates that management is in a unique position to be able to override internal controls. This is considered a control risk.
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Managers and/or employees may attempt to conceal the fraud by:
Audit collusion is a situation where two or more individuals work together to override a system of internal controls. Internal control systems are built around the concept of segregation of duties. Where collusion exists, segregation of duties is overridden.
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Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
Fraudulent financial reporting includes the intentional misstatement or omission of amounts or disclosures in financial statements and are designed to deceive users of the financial statements. This reaction from management would indicate a higher risk of fraud than a management with public respect and diligence of regulations and authority. Of the remaining options, these are not necessarily indicative of fraud or a higher risk of fraud.
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Of the following characteristics, which would most likely raise an auditor's concern about the risk of material misstatement arising from fraud?
The CPA auditor's concern about fraud risk would be raised if the company was unable to generate cash flows while reporting earnings growth as these two factors are inconsistent.
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In the pursuit of maintaining professionally skeptical, an auditor should conduct all of the following procedures except:
Professional skepticism encourages cordial and polite behavior while analyzing evidence and keeping an open mind for potential risks of fraud. Demanding compliance from management is not professionally skeptical.
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