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Overview of Statement on Auditing Standard 99: Consideration of Fraud in a Financial Statement Audit

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I. Overview of Statement on Auditing Standard 99: Consideration of Fraud in a Financial Statement Audit

Statement of Auditing Standard 99 ("SAS 99") was issued by the Auditing Standards Board in October 2002. SAS 99 provides an extensive outline of the responsibilities of auditors in assessing the risk of material misstatement of financial statements due to fraud. Specifically, the key audit requirements of SAS 99 and the responsibility of auditors include the following:

1. Understanding the definition of fraud, characteristics of fraud, types of fraud, the conditions that exist as a catalyst to fraud, management and employee involvement in fraud, and the concealment of fraud.

2. Using professional skepticism appropriately when considering the risk of material misstatements due to fraud.

3. A brainstorming session of the audit team to evaluate possible sources of the occurrence of a material misstatement in the financial statements due to fraud. This objective of this exercise is for the audit team to consider various scenarios that may present incentive, opportunity or rationalization for fraudulent activity to occur among management. It is important that the audit team consist of experienced auditors that can lend insight on how fraud may be carried out.

4. Obtaining the information to identify risks of material misstatement due to fraud. Auditors are required to perform the following procedures:

* Make inquiries of management and employees about fraud

* Consider any unusual or unexpected relationships as a result of analytical procedures

* Consider the existence of fraud risk factors

* Consider any other relevant information that may indicate fraud

5. Analyze and consider various factors of fraud risk from the information gathered to determine possible material misstatement in the financial statements. Using the guidance, auditors are required not only to apply the knowledge obtained and compare it to the standard factors of incentive, opportunity and rationalization, but they are also required to think outside the box for possible sources of fraud. Additional consideration is required for improper revenue recognition and management override of controls.

6. Determine if an entity's programs and controls are designed and operating property and use that information to assess the potential of any identified risks.

7. Respond to the results of the risk assessment by providing:

* A general response on the overall effect of how the audit is performed

* A response

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