Specific Responses—Misstatements Due to Specific Responses—Misstatements Due to Misappropriation of Assets

Specific Responses—Misstatements Due to Misappropriation of Assets

Differing circumstances would necessarily dictate different responses. Ordinarily, the audit response to an assessed risk of material misstatement due to fraud relating to misappropriation of assets will be directed toward certain account balances and classes of transactions. Although some of the audit responses noted in the two categories above may apply in such circumstances, the scope of the work is to be linked to the specific information about the misappropriation risk that has been identified.

Examples of responses to the auditor’s assessment of the risk of material misstatements due to misappropriation of assets are as follows:

 Counting cash or securities at or near year-end.

 Confirming directly with customers the account activity (including credit memo and sales return activity as well as dates payments were made) for the period under audit.

 Analysing recoveries of written-off accounts.

 Analysing inventory shortages by location or product type.

 Comparing key inventory ratios to industry norm.

 Reviewing supporting documentation for reductions to the perpetual inventory records.

 Performing a computerised match of the supplier list with a list of employees to identify matches of addresses or phone numbers.

 Performing a computerised search of payroll records to identify duplicate addresses, employee identification or taxing authority numbers or bank accounts.

 Reviewing personnel files for those that contain little or no evidence of activity, for example, lack of performance evaluations.

 Analysing sales discounts and returns for unusual patterns or trends.

 Confirming specific terms of contracts with third parties.

 Obtaining evidence that contracts are being carried out in accordance with their terms.

 Reviewing the propriety of large and unusual expenses.

 Reviewing the authorisation and carrying value of senior management and related party loans.

 Reviewing the level and propriety of expense reports submitted by senior management.