ACCA AAA · Chapter 8
Fraud and error
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Fraud lens identify risk and challenge evidence
Fraud and error
- Fraud: intentional deception for unjust or illegal advantage
- Error: unintentional misstatement or omission
Financial statement misstatement
- Difference from the reporting framework
- May affect amount, classification, presentation or disclosure
- May arise from fraud or error
Management and TCWG
- Primary responsibility for preventing and detecting fraud
- Set culture and maintain effective controls
Auditor
- Reasonable assurance against material misstatement
- Maintain scepticism despite past honesty of management
Fraud can be concealed
- False explanations, forged documents, withheld evidence
- Collusion and override may circumvent controls
Management fraud
- May override controls, manipulate records or estimates
- Even a small fraud can undermine integrity and other evidence
Error-prone circumstances
- New systems, rapid growth, inexperienced staff
- Complex transactions, estimates and unreliable data
- Unresolved prior misstatements or control deficiencies
Distinguish intention
- Deception or concealment suggests fraud rather than error
Fraud risk factors
- Incentive or pressure: bonus or covenant target
- Opportunity: weak controls or unrestricted journals
- Attitude or rationalisation: justifying manipulation
Financial reporting
- Pressure to achieve targets; unusual year-end revenue
- Subjective estimates; unusual transactions without rationale
- Complex or undisclosed related-party dealings
Misappropriation and concealment
- Poor control over cash or portable inventory
- Missing documents or changing explanations
Evaluate in context
- Link indicator to affected balance, assertion or disclosure
- A risk factor alone does not establish fraud
Revenue recognition
- Presumed fraud risk; assessed fraud RoMM is significant
- Consider fictitious or premature sales and concealed returns
- Rebut only with documented reasons
Management override
- Consider journals, estimate judgments and unusual transactions
- Override remains a fraud risk regardless of controls
Management bias
- Lack of neutrality may be intentional or unintentional
- Look for optimistic assumptions and consistent profit effects
Overall evaluation
- Assess direction and cumulative effect of judgments
- Consider whether bias signals material fraud risk
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