Name: Judy Kiarie

Date: 5/5/2013

Course Name: ACC 555 Fraud examination

Unit Number: 4

Research Paper: The statement on Auditing Standards No. 99

Statement on Auditing Standards No. 99

Table of Content
Introduction ...........................................................................................................................................................1

SAS 99....................................................................................................................................................................2

Components of SAS 99 ......................................................................................................................................3

Impact of SAS 99 on the auditing procedures ....................................................................................................4

Concept of risk of material misstatement due to fraud ......................................................................................5

How the Concept of risk can be used to detect one of the financial misstatements ........................................6

Statement on Auditing Standards No. 99

Introduction For audits beginning on or after December 15, 2002, auditors implemented Statement on Auditing Standards SAS 99 (AU 316). This standard provides guidance to auditors in fulfilling the responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement (AU section 110) as it relates to fraud in an audit of financial statements conducted in accordance with generally accepted auditing standards.1

Some of the major components of SAS 99 include: Description and characteristics of fraud

This component describes fraud and its characteristics. Importance of exercising professional skepticism

This component indicates the importance of exercising professional skepticism. This section discusses the need for auditors to exercise professional skepticism when considering the possibility that a material misstatement due to fraud could be present. Discussion among engagement personnel regarding the risks of material misstatement due to fraud.

This section requires, as part of planning the audit, that there be a discussion among the audit team members to consider how and where the entity's nancial statements might be susceptible to material misstatement due to fraud and to reinforce the importance of adopting an appropriate mindset of professional skepticism. Obtaining information needed to identify risks of material misstatement due to fraud This component requires the auditor to gather information necessary to identify risks of material misstatement due to fraud, by inquiring of management and others within the entity about the risks of fraud, considering the results of the analytical procedures performed in planning the audit and considering fraud risk factors.

http://www.aicpa.org/Research/Standards/AuditAttest/Pages/SAS.aspx#SAS84

Statement on Auditing Standards No. 99

Identifying risks that may result in a material misstatement due to fraud. This component requires the auditor to use the information gathered to identify risks that may result in a material misstatement due to fraud. Assessing the identied risks after taking into account an evaluation of the entity's programs and controls. This component requires the auditor to evaluate the entity's programs and controls that address the identied risks of material misstatement due to fraud, and to assess the risks taking into account this evaluation. Responding to the results of the assessment. This component emphasizes that the auditor's response to the risks of material misstatement due to fraud involves the application of professional skepticism when gathering and evaluating audit evidence. Evaluating audit evidence. This component requires the auditor to assess the risks of material misstatement due to fraud throughout the audit and to evaluate at the completion of the audit whether the accumulated results of auditing procedures and other observations affect the assessment. It also requires the auditor to consider whether identied misstatements may be indicative of fraud and, if so, directs the auditor to evaluate their implications. Communicating about fraud to management, those charged with governance, and others. This component provides guidance regarding the auditor's communications about fraud to management, those charged with governance, and others. Documenting the auditor's consideration of fraud. This component describes related documentation requirements.

(AU Section 316 Consideration of Fraud in a Financial Statement Audit (Supersedes SAS No. 82.))

Statement on Auditing Standards No. 99

Impact of SAS 99 on the auditing procedures This standard changed the way audits were being conducted in an effort to further strengthens the consideration and possible detection of fraud. The AICPA, through SAS 99, strengthened the auditing procedures to ensure financial statements are free of any material misstatement caused by fraud. SAS 99 was organized in such a way as to allow for a logical thought process to be undertaken from the initial audit planning until the final reporting stages. Research conducted on the success of SAS 99 shows that , it has increased the attention of companies more towards detecting fraud during the audit process , and that the procedures being used under SAS 99 are effective. The respondents of the research also moderately agreed that there have been changes in testing, most notably in the area of substantive tests, and that unpredictability in testing has increased, however, as to whether more unusual transactions are actually uncovered in an audit has yet to be established . For instance due to the 2008 financial scandals there part of the substantive testing has been reviewing of prioryear accounting estimates and an increased use of specialists as a result the auditing timing and costs has to an extent gone up, but companies are realizing the costs are worth spent as ensures the stability of company n so far as no frauds being detected. Most of all SAS 99 has prompted auditors to focus on, and subsequently uncover more, unusual transactions.

Concept of risk of material misstatement due to fraud The identication of a risk of material misstatement due to fraud involves the application of professional judgment and includes the consideration of the attributes of the risk, including: the type of risk that may exist, that is, whether it involves fraudulent nancial reporting or misappropriation of assets ,the signicance of the risk, that is, whether it is of a magnitude that could lead to result in a possible material misstatement of the nancial statements, the likelihood of the risk, that is, the likelihood that it will result in a material misstatement in the nancial statements and the pervasiveness of the risk, that is, whether the potential risk is pervasive to the nancial statements as a whole or specically related to a particular assertion, account, or class of transactions. How the Concept of risk can be used to detect one of the financial misstatements Material misstatements due to fraudulent nancial reporting often result from an overstatement of revenues for example, through premature revenue recognition , recording of ctitious revenues or an understatement of revenues for instance by improperly shifting revenues to a later period. For instance in the case of how to steal a million dollars without taking cash, illustrates an example of revenue fraud. As much as the company had strong internal controls they failed to regularly audit their internal control process to see if they were effective and able to capture all risks and as such Seneca the perpetrator of the fraud was able

Statement on Auditing Standards No. 99

to post payments of invoices to customers with ageing accounts before the weekly meeting review without anyone finding out this scheme until the auditor noticed his reluctance of assisting during audits hence taking a deeper look to discover the fraud. The auditors action also showcases one of the components of auditing discussed earlier about engaging personnel about the risks of material misstatement and therefore Senecas behavior does require an auditor to further investigate whether it was reluctance to help or whether he was simply trying to hide something. Hence an auditor has to always be aware of potential risk of material misstatement due to fraud relating to revenue recognition. The auditing procedures that an auditor would implement during an audit if there is an identied risk of material misstatement due to fraud that involves improper revenue recognition would include; Performing substantive analytical procedures relating to revenue using disaggregated data, for example, comparing revenue reported by month and by product line or business segment during the current reporting period with comparable prior periods. Computer-assisted audit techniques may be useful in identifying unusual or unexpected revenue relationships or transactions. Conrming with customers certain relevant contract terms and the absence of side agreements, because the appropriate accounting often is inuenced by such terms or agreements.23 For example, acceptance criteria, delivery and payment terms, the absence of future or continuing vendor obligations, the right to return the product, guaranteed resale amounts, and cancellation or refund provisions often are relevant in such circumstances. Inquiring of the entity's sales and marketing personnel or in-house legal counsel regarding sales or shipments near the end of the period and their knowledge of any unusual terms or conditions associated with these transactions. Being physically present at one or more locations at period end to observe goods being shipped or being readied for shipment (or returns waiting processing) and performing other appropriate sales and inventory cutoff procedures. For those situations for which revenue transactions are electronically initiated, authorized, processed, and recorded, testing controls to determine whether they provide assurance that recorded revenue transactions occurred and are properly recorded.

(Official Releases. SAS No. 99." Journal Of Accountancy 195, no. 1 (January 2003): 105-120. Business EBSCOhost (accessed May 25, 2013).)

Source Complete,

Statement on Auditing Standards No. 99

References

Buchholz, AK 2012, 'SAS 99: Deconstructing the Fraud Triangle and Some Classroom Suggestions', Journal Of Leadership, Accountability & Ethics, 9, 2, pp. 109-118, Business Source Complete, EBSCOhost, viewed 25 May 2013 Marczewski, Donald C., and Michael D. Akers. "CPAs' Perceptions of the Impact of SAS 99." CPA Journal 75, no. 6 (June 2005): 38-40. Business Source Complete, EBSCOhost (accessed May 25, 2013). Official Releases. SAS No. 99." Journal Of Accountancy 195, no. 1 (January 2003): 105-120. Business Source Complete, EBSCOhost (accessed May 25, 2013). AU Section 316 Consideration of Fraud in a Financial Statement Audit (Supersedes SAS No. 82.) SAS No. 99; SAS No. 113. Effective for audits of nancial statements for periods beginning on or after December 15, 2002, unless otherwise indicated. Retrieved from http://www.aicpa.org/Research/Standards/AuditAttest/DownloadableDocuments/AU-00316.pdf