Case 4: Use of outsiders Help

A Financial Institution loaned money from Company Y, Which subsequently Loaned money to Company X.
Company X then purchased a land from the Financial Institution . This kind of transaction is difficult to
detect because it engages complex transactions with related parties, such as entities formed to accomplish
specific purposes, that are structured to misrepresent the financial position or financial performance of the
entity. It can be that someone in the company creates fictitious terms of transactions with related parties
designed to misrepresent the business rationale of these transactions.

Recommendation:
The Auditor must exercise Professional Skepticism. During the audit, the auditor may inspect records or
documents that indicate the existence of related party relationships or transactions that management has
not previously identified or disclosed to the auditor. . Examples of those records or documents include the
following:

Third party confirmations obtained by the auditor.

Information supplied by the entity to regulatory authorities.
Significant contracts renegotiated by the entity during the period.
Capital financing arrangements with entities other than financial institutions.
The auditor may also inquire some information from the Management, but since auditor suspects
that the management has committed a fraud, the auditor might find the information less reliable.
The auditor can also disclose this information to people inside the entity that has a high authority,

such as those who manages the Entity to help them fix this kind of fraud. It is important that the
Auditor must tell this as soon as possible to those people.
Case 5 Reluctance of people what they know
Discussion: Reluctance of people what they know is when the employees of the company Knows the there
is fraud happening inside the company but they do not help external creditors in revealing the fraud. Case 5
is a good example of this kind of fraud. In this case, The CFO of an Entity asked the employees to do
something very unusual. The employees went alone without asking any questions to the CFO. The CFO
asked them to increase the earning of the entity by $105 million , The CFO did not give further information
about how to do it.
Although the division controller is skeptic, he did not challenge the higher authority of the company. More
than 20 employees were involved in this Fraud but they conceal and Fabricate the Documents to support
the transaction entries if they were questioned.

Safeguards:
The Auditor should make inquiries about the management concerning the risks of material misstatements in
the Financial Statements resulting from employee frauds. But, asking Information inside the Entity can be
useless when the Financial statements have Management Fraud, This will just give the Fraudsters the
opportunity to conceal the information

Employees with different levels of authority.

Employees involved in making the complex transactions, and those who Supervise those

Employees.
In house Legal counsel.
Chief Ethics officer

Operating Personnel who are not directly involved in Financial Reporting process.
Persons charged with dealing the allegations of Fraud.

The auditor must evaluate the managements responses with an attitude of Professional Skepticism, He
must Judge in necessary to corroborate to inquiries of other information.
Recommendation:
If the External Auditor already concluded that there is a Fraud within the Entity, He must disclose the
information to people who Govern the entity, since its their responsibility to detect and stop fraud. If the
auditor observed that the People who Manage the Entity are not doing the thing that are required to be
done to stop the Fraud, He must withdraw from the Engagement.