1a. An auditor conducting an audit obtains reasonable assurance that the financial statements taken as a whole are free from material misstatement, whether caused by fraud or error. When obtaining reasonable assurance, an auditor maintains an attitude of professional skepticism throughout the audit considers the potential for management override of controls and recognizes the fact that audit procedures that are effective for detecting error may not be appropriate in the context of an identified risk of material misstatement due to fraud. b. Fraudulent financial reporting can involve intentional misstatements including the omission of amounts or disclosures in financial statements to deceive financial statement users, and management override of controls that otherwise may appear to be operating effectively. Misappropriation of assets involves the theft of an entity’s assets and is often perpetrated by employees in relatively small and immaterial amounts. However, it can also involve management who are usually more able to disguise or conceal misappropriations in ways that are difficult to detect. Misappropriation of assets is often accompanied by false or misleading records or documents in order to conceal the fact that the assets are missing or have been pledged without proper authorization. c. When obtaining an understanding of the entity and its environment, including its internal control, the auditor may identify events or conditions that indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Such events or conditions are referred to as fraud risk factors. Risk factors are classified based on the three conditions that are generally present when fraud exists: an incentive or pressure to commit fraud; a perceived opportunity to commit fraud, and an ability to rationalize the fraudulent action. d. During the years of 95 through 97, there was an incentive to or pressure to commit fraud. In the CUC’s case,...
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