Fraud Risk in Governmental and Not-for-Profit Organizations

Chapter 3 THE AUDITOR'S CONSIDERATION OF FRAUD IN A FINANCIAL STATEMENT AUDIT

LEARNING OBJECTIVES

After completing this chapter, you should be able to do the following:

• Identify the definition of fraud for financial reporting purposes.
• Identify the fraud risk factors that comprise the fraud triangle.
• Determine the auditor's responsibilities related to fraud under AU-C section 240, Consideration of Fraud in a Financial Statement Audit (AICPA, Professional Standards).

Auditor Responsibilities and Marketplace Expectations

Fraud is a broad legal concept, and management and those charged with governance of governmental and not-for-profit entities and their stakeholders may confuse the legal aspect of fraud with its definition for financial reporting purposes. In a financial statement audit, the auditor is concerned with fraud that causes a material misstatement in the financial statements as a result of

• fraudulent financial reporting, and
• misappropriation of assets.

AU-C section 240 defines fraud as

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in financial statements that are the subject of an audit.

Key Point
	It may be helpful to discuss the differences between legal and accounting fraud with staff or client personnel. In some ...