Palomar College. Statement of Auditing Standards 99

Transcription

1 Palmar Cllege Statement f Auditing Standards 99 Why is it imprtant t becme familiar with the cntent f Statement n Auditing Standards (SAS) N. 99? The answer begins with a few questins Hw wuld yu feel if fraud were discvered in an area under yur respnsibility and that fraud had been ging n fr five r ten years? 2. Given the scenari described in Item 1, hw d yu think thers wuld perceive things? While fraud can never be cmpletely eliminated, steps can be taken tward detecting it in a timely manner. Becming familiar with the risk factrs and cnditins utlined in SAS N. 99 will place emplyees in a better psitin t recgnize situatins which are assciated with the cmmissin f fraudulent acts. In additin, management persnnel shuld cnsider the risk factrs listed in SAS N. 99, especially thse under "Opprtunities" and "Attitudes / Ratinalizatins", when develping internal cntrls fr their areas f respnsibility. Fr example, inadequate r missing cntrls related t the apprval f payrll transactins will increase the likelihd that fraud culd ccur and nt be detected in a timely manner. T mitigate the likelihd f fraud ccurring in payrll, internal cntrls wuld be implemented t ensure that all payrll transactins are prperly apprved. Backgrund Infrmatin SAS N. 99 establishes standards and prvides guidance t external auditrs in fulfilling their respnsibility as it relates t fraud in an audit f the Cllege's financial statements. SAS N. 99 supersedes SAS N. 82 which had the same title. It is effective fr audits f financial statements fr perids beginning n r after December 15, 2002 with earlier implementatin permissible. SAS N. 99 cvers a number f issues, including, but nt limited t, the fllwing: Describes fraud and its characteristics, including the aspects f fraud particularly relevant t an audit f financial statements Requires, as part f planning the audit, that there be a discussin amng the audit team members t cnsider the susceptibility f the Page 1 f 8 Created n 5/27/2004 3:39:00 PM

2 entity's financial statements t material misstatement due t fraud and t reinfrce the imprtance f having a mindset f prfessinal skepticism: An attitude that includes a questining mind and critical assessment f audit evidence. Sme examples demnstrating the applicatin f prfessinal skepticism in respnse t the auditr's assessment f the risk f material misstatement due t fraud include... increased sensitivity in the selectin f the nature and extent f dcumentatin t be examined in supprt f material transactins, and increased recgnitin f the need t crrbrate management explanatins r representatins cncerning material matters, such as further analytical prcedures, examinatin f dcumentatin, r discussin with thers within r utside the entity. Requires the auditr t gather the infrmatin necessary t identify the risks f material misstatement due t fraud, by the fllwing... Making inquiries f management and thers within the entity Cnsidering the results f analytical prcedures perfrmed in planning the audit Cnsidering fraud risk factrs Cnsidering certain ther infrmatin Requires the auditr t use the infrmatin gathered abve t identify risks that may result in a material misstatement due t fraud Requires the auditr t evaluate the entity's prgrams and cntrls that address the identified risk f material misstatement Requires antifraud prgrams and cntrls be put in place by management under three fundamental activities: Creating an ethical institutinal culture Implementing antifraud prcesses and cntrls Develping an effective prgram versight prcess It shuld be nted that all f the risk factrs indicated in SAS N. 99 are nt applicable t higher educatin. Page 2 f 8 Created n 5/27/2004 3:39:00 PM

3 Selected Risk Factrs Identified in SAS N. 99 The risk factrs indicated in SAS N. 99 are gruped in the fllwing categries: Misstatements Arising Frm Fraudulent Financial Reprting Incentives / Pressures Opprtunities Attitudes / Ratinalizatins Misstatements Arising Frm Misapprpriatin f Assets Incentives / Pressures Opprtunities Attitudes / Ratinalizatins Risk Factrs Relating t Misstatements Arising Frm Fraudulent Financial Reprting Risk factrs related t misstatements arising frm fraudulent financial reprting are as fllws: Fraudulent Financial Reprting - Incentives / Pressures Threatened financial stability r prfitability (may be ecnmic, industry, r entity perating cnditins) High degree f cmpetitin r market saturatin, alng with declining margins High vulnerability t rapid changes (e.g. in technlgy, prduct bslescence, r interest rates) Significant declines in custmer demand Increasing business failures in either the verall ecnmy r specific industry Operating lsses (e.g. thrugh the threat f freclsure, bankruptcy, r hstile takever) Recurring negative cash flws frm peratins Inability t generate cash flws frm peratins while reprting earnings and earnings grwth Rapid grwth r unusual prfitability, especially when cmpared t ther cmpanies in the same industry New accunting, regulatry r statutry requirements Excessive third party pressures that exist fr management, including the fllwing: Page 3 f 8 Created n 5/27/2004 3:39:00 PM

4 Prfitability r trend expectatins frm investment analysts, institutinal investrs, significant creditrs, r ther external parties, especially when thse expectatins are unduly aggressive r unrealistic Includes expectatins created by management (e.g. press releases r annual reprt messages) Need t btain debt r equity financing t stay cmpetitive (e.g. the financing f majr research and develpment r capital expenditures) Ability t meet debt repayment r ther debt cvenant requirements Perceived r real adverse effects f reprting pr financial results n significant pending transactins, (e.g. business cmbinatins r cntract awards) Persnal net wrth f management r the bard f directrs is threatened by the entity s financial perfrmance arising frm the fllwing situatins: Large cncentratins f their persnal net wrth in the business r rganizatin Significant prtins f their cmpensatin cntingent upn achieving aggressive n perating results, financial psitin, cash flw, r stck price Cmpensatin may include bnuses, stck ptins, etc, Persnal guarantees f the debt f the business r rganizatin that are significant t their persnal net wrth Excessive pressure n management r perating persnnel t meet financial targets set up by the bard f directrs r management Fraudulent Financial Reprting - Opprtunities The nature f an industry and the entity's peratins may prvide pprtunities t engage in fraudulent financial reprting arising frm the fllwing: Significant related-party transactins Significant estimates f assets, liabilities, revenues, r expenses that invlve subjective judgments and/r uncertainties that are difficult t cnfirm Significant, unusual, r highly cmplex transactins, especially clse t year end transactins invlving "substance ver frm" issues Significant peratins lcated r cnducted acrss internatinal brders Page 4 f 8 Created n 5/27/2004 3:39:00 PM

5 Significant bank accunts r subsidiary / branch peratins in taxhaven jurisdictins that d nt appear t have a clear business justificatin Mnitring f management is ineffective resulting frm the fllwing: Dminatin f management by a single persn r small grup withut cmpensating cntrls Ineffective bard f directrs versight ver the financial reprting prcess and internal cntrl Ineffective audit cmmittee versight ver the financial reprting prcess and internal cntrl A cmplex r unstable rganizatinal structure is present, evidenced by the fllwing: Difficulty in determining the cntrlling interest in the entity Overly cmplex rganizatinal structure, invlving unusual managerial lines f authrity High turnver f senir management psitins, cunsel, and / r bard members Deficient internal cntrl cmpnents, resulting frm the fllwing: Inadequate mnitring f cntrls High turnver rates accunting, internal audit, r infrmatin technlgy staff Emplyment f ineffective accunting, internal audit, r infrmatin technlgy staff Ineffective accunting and infrmatin systems Fraudulent Financial Reprting - Attitudes / Ratinalizatins The fllwing cnditins may indicate risk factrs that are reflective f the attitudes / ratinalizatins f thse individuals (e.g. bard members, management, and ther emplyees) wh culd engage in and/r justify financial reprting by the entity: Entity's values and ethical standards Ineffective cmmunicatin f the entity's values and ethical standards Ineffective supprt by management f the entity's values and ethical standards Cmmunicatin f inapprpriate values r ethical standards t the entity's emplyees Excessive participatin in r preccupatin with the selectin f accunting principles and / r the determinatin f significant estimates by nn-financial management persnnel Page 5 f 8 Created n 5/27/2004 3:39:00 PM

6 Knwn histry f vilatins f varius laws and regulatins, i.e. histry may repeat itself Claims against the entity, senir management r bard members alleging fraud r vilatins f laws and regulatins, i.e. smke can suggest fire A practice by management f cmmitting t achieve aggressive r unrealistic frecasts t third parties Management's failure t crrect knwn reprtable cnditins n a timely basis Management's recurring attempts t justify marginal r inapprpriate accunting n the basis f materiality A strained relatinship between management and the current r predecessr auditr, as evidenced by the fllwing: Frequent disputes with the auditr (current r predecessr) in regards t accunting, auditing, r reprting issues Unreasnable demands n the auditr (e.g. unreasnable time cnstraints regarding the cmpletin f the audit) Frmal r infrmal restrictins placed n the auditr that inapprpriately limits his r her access t peple r infrmatin Frmal r infrmal restrictins placed n the auditr that inapprpriately limits his r her ability t cmmunicate effectively with the bard f directrs r audit cmmittee Dmineering management behavir in dealing with the auditr, especially invlving attempts by management t... Influence the scpe f the auditr s wrk Influence the selectin r cntinuance f audit persnnel assigned t the engagement Risk Factrs Relating t Misstatements Arising Frm Misapprpriatin f Assets Risk factrs related t misstatements arising frm fraudulent financial reprting may verlap thse related t misstatements arising frm misapprpriatin f assets. Fr example, weaknesses in internal cntrl may be present when misstatements due t either fraudulent financial reprting r misapprpriatin f assets exists. Risk factrs related t misstatements arising frm misapprpriatin f assets are as fllws: Misapprpriatin f Assets - Incentives / Pressures Persnal financial bligatins may create pressure n management and emplyees t misapprpriate assets, especially when thse Page 6 f 8 Created n 5/27/2004 3:39:00 PM

7 individuals have access t cash r ther assets that are susceptible t theft Adverse relatinships between the entity and emplyees may mtivate emplyees t misapprpriate assets, especially when thse emplyees have access t cash r ther assets that are susceptible t theft. Adverse relatinships can be created by numerus situatins, including the fllwing: Future emplyee layffs Emplyee expectatins are incnsistent with prmtins, cmpensatin, r ther rewards Misapprpriatin f Assets - Opprtunities Certain circumstances increase the susceptibility f assets t misapprpriatin. Opprtunities t misapprpriate assets increase when there are... Large amunts f cash n hand Large amunts f cash in prcessed by the entity Inventry items that are... Small in size Of a high value In high demand Easily cnvertible assets, such as... Bearer bnds Cmputer chips Fixed assets that are... Small in size Marketable Lacking bservable identificatin f wnership Inadequate internal cntrl ver assets increase the susceptibility f assets t misapprpriatin. Misapprpriatin f assets may ccur when the fllwing internal cntrl weaknesses exist: Inadequate segregatin f duties Inadequate management versight f emplyees respnsible fr assets Including remte lcatins Inadequate jb applicant screening f prspective emplyees that will have access t assets Inadequate recrd keeping in regards t assets Inadequate system t authrize transactins Page 7 f 8 Created n 5/27/2004 3:39:00 PM

8 Inadequate system t apprve transactins Inadequate physical safeguards ver Cash Investments Inventry Fixed assets Lack f timely and apprpriate dcumentatin f transactins Lack f mandatry vacatins fr emplyees that perfrm key internal cntrl functins Inadequate understanding f infrmatin technlgy by management persnnel Culd enable infrmatin technlgy emplyees t cmmit a misapprpriatin Inadequate access t cntrls assciated with autmated recrds Misapprpriatin f Assets - Attitudes / Ratinalizatins The fllwing cnditins may indicate risk factrs that are reflective f the attitudes f emplyees (wh have access t assets susceptible t misapprpriatin) that allw them t justify the misapprpriatin f such assets: Disregarding the need t reduce risks related t the misapprpriatin f assets Disregarding internal cntrls related t the misapprpriatin f assets by... Overriding existing cntrls Failing t crrect knwn internal cntrl deficiencies Displaying behavir that indicates... Dissatisfactin with the cmpany Displeasure with the cmpany's treatment f the emplyee Displaying changes in behavir r lifestyle that may indicate that assets have been misapprpriated Nte 1: The abve infrmatin was btained frm Appendix A f SAS N. 99 [AU Sectin 316 (Cnsideratin f Fraud in a Financial Statement Audit)], prepared by the American Institute f Certified Public Accuntants (AICPA). Page 8 f 8 Created n 5/27/2004 3:39:00 PM