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I have a question with regard to Q73 from Kaplan’s Exam Kit.
The problem says that “During the year, it was discovered that a payroll clerk had been setting up fictitious employees on the payroll system with the wages being paid into the clerk’s own bank account. This clerk has subsequently left the company but you are concerned that additional frauds may have taken place in the wages department due to a lack of adequate and effective internal controls”.
The Question is:
73 With respect to the fraud at Swandive Co, which of the following statements is TRUE?
? This fraud is an example of fraudulent financial reporting
? The auditor will need to reduce control risk
? Detection risk will need to increase as a result of the fraud
? The audit team should discuss the susceptibility of Swandive Co to fraud
Only Option 4 is correct per the answers. I don’t understand why detection risk is not increased as a result of the fraud committed.
Thanks in advance,
As this is not a past exam question I can only suppose the point this is trying to make, which is that the first thing to do is find out more about it – e.g whether management is aware of other frauds and what management has done about the fraud that was discovered e.g. if new additional controls have been implemented.