EXPRESSION OF OPINION

When we set goals, we consider what’s possible and what challenges we might
face. In money matters, frauds and error happen often. Financial statements
are meant to show a company’s true financial health. The main job of an audit
is to make sure these statements are honest and not misleading.
In the past, audits mainly checked for math errors, which allowed some
companies to manipulate their financial results. A key case in England led to
new laws that require auditors to say if financial statements are “true and fair.”
This means auditors now focus more on the trustworthiness of the statements
rather than just numbers. A statement can still be reliable even with small
mistakes, but major errors or fraud must be found because they can mislead
people.
While finding fraud is important, the main goal of an audit is to check how
reliable the financial statements are. If serious fraud isn’t found during an
audit, it’s not seen as a failure if the auditor did their job correctly. This
principle was established in a famous case back in 1896.

FRAUD
FRAUD THROUGH DEFALCATION.
Following are the methods of defalcation involving misappropriation of cash or
goods
1. Not Recording Receipts: Keeping cash received but not writing it down
in the cashbook.
2. Destroying Receipts: Getting rid of copies of receipts to hide cash taken.
3. Entering Less on Receipts: Writing a smaller amount on the receipt and
keeping the extra cash.
4. Omitting Casual Sales: Not recording cash from occasional sales, like
scrap or old newspapers.
5. Ignoring Donations: Not recording cash donations received by charities.
6. Misusing Discounted Bills: Taking cash from bills that were paid early but
pretending they are still unpaid.
7. Faking Debtor Accounts: Taking cash from customers and pretending
they still owe money by recording false debts or returns.
8. Teeming and Lading: Stealing cash from one customer and using
payments from another customer to cover it up, creating a cycle of theft.
9. Hiding Cash Sales: Not recording cash sales or incorrectly marking them
as credit sales.
10.Misusing VPP Sales: Taking cash from sales sent through the mail and
pretending the goods weren’t approved.
11.Under-Recording Cashbook: Writing a lower total on cash received than
what was actually received.
12.Bogus Payments: Creating fake payments in the records.
13.Inflating Payments: Writing down more paid amounts than what was
actually spent by changing the numbers.
14.Double Payments: Listing the same payment twice to take extra money.
15.Misclassifying Purchases: Saying purchases made on credit were cash
purchases to take the cash.
16.Personal Expenses as Business: Claiming personal expenses as business
costs to take more money.
17.Not Recording Discounts: Ignoring discounts given by suppliers and
keeping that money.
18.Over-Recording Payments: Writing down a higher total for payments
than what was actually paid.
19.Fictitious Purchases: Claiming fake or inflated purchases to take extra
money.
20.Ignoring Credit Notes: Not recording returns to suppliers and claiming
full payment.
21.Fake Workers: Listing fake employees on the payroll to take their wages.
 22.Over-Counting Wages: Writing a higher total for wages paid than what
was actually paid out.
23.Taking Unpaid Wages: Stealing wages that were supposed to be given
out but weren’t.

FRAUD THROUGH MANIPULATION OF

ACCOUNTS
Fraud through manipulation of accounts means making financial statements
look better than they really are. This is often called window dressing because it
presents a false picture of a company's profits and financial health.
Typically, this type of fraud is done by top management and doesn’t involve
stealing cash or goods. Instead, it involves either:
 Overstating profits (making profits look higher than they are)
 Understating losses (making losses look smaller)
The goal is to make the company look more successful than it truly is, and this
kind of fraud can be hard to detect.

ERRORS DEFINITION
Errors are unintentional mistakes made in financial records by bookkeepers.
These mistakes happen due to negligence or lack of knowledge. There are two
main types of errors:
1. Principal Errors
These occur when accounting rules are not followed when recording
transactions. They can be hard to find because the overall totals (Trial Balance)
still match. Examples include:
 Recording capital expenses (like buying machinery) as regular expenses
(like wages).
 Mistakenly recording money received as a capital receipt instead of a
revenue receipt.
 Incorrectly estimating bad debts or discounts.
  Misclassifying rent payments.
 Wrongly valuing inventory.
2. Clerical Errors
These happen due to carelessness by accounting staff. They are also called
technical errors and can be divided into:
 Errors of Omission: Forgetting to record a transaction.
 Errors of Commission: Making a mistake when recording a transaction
(like entering the wrong amount).
 Duplicating Errors: Recording the same transaction more than once.
 Compensating Errors: Errors that cancel each other out.

REASONS AND CIRCUMSTANCES

R.K. Mautz identified several reasons why errors happen in accounting, and he
includes fraud as a type of error. Here are the main reasons:
1. Lack of Knowledge: Employees might not understand accounting
principles, how to classify accounts correctly, or good accounting
practices.
2. Carelessness: Mistakes can happen simply because people are not
paying attention while doing their accounting work.
3. Hiding Problems: Some may try to hide losses or shortages by
manipulating the accounts.
4. Bias from Management: Management might allow their personal
feelings or biases to influence how they record transactions or present
financial information.
5. Minimizing Taxes: There’s often a strong desire to reduce the amount of
taxes owed, which can lead to accounting errors.
6. Intentional Misconduct: A more serious issue is when people in
authority deliberately:
o Overstate Financial Results: Make the company look better than it
is.
 o Understate Financial Results: Make it seem worse to hide
problems.
o Benefit Personally: Use errors to gain personal advantages.

Risk of Fraud and Error in Audit

When conducting an audit, several factors can increase the likelihood of fraud
or errors happening in a company. Here are the key events that auditors need
to be aware of:
1. Weak Internal Controls:
o Internal controls are systems put in place to ensure accurate
financial reporting and to prevent fraud. If these controls are weak
or not followed, it creates a risk.
o For example, if one person is in charge of handling all incoming
mail and also decides where it goes, there’s a risk of
mismanagement or fraud. Ideally, there should be multiple people
involved in these processes to ensure checks and balances.
2. Concerns About Management:
o If there are doubts about the honesty or ability of the
management team, this raises red flags. Signs include:
 A single person having too much control over decisions.
 High turnover rates among employees, indicating instability.
 Frequent changes in legal advisors or auditors, which can
suggest problems.
 Understaffing in the accounting department, making it hard
to manage finances properly.
3. Pressure Within the Company:
o Sometimes, external pressures can create an environment where
fraud might occur. For example:
 If the overall industry is doing well, but the company is not
performing, management might feel pressured to
manipulate numbers to show better results.
  Heavy reliance on one product line can be risky if that
product does poorly.
 If a company needs to show higher profits to keep its stock
price up, there might be a temptation to distort financial
reports.
4. Unusual Transactions:
o Transactions that seem odd or out of the ordinary can signal
potential fraud. Examples include:
 Deals with related parties (like family members or close
associates) that may not be at arm's length, meaning they
aren't conducted fairly.
 Payments that seem excessively high for services provided,
such as legal fees that don’t match the work done.
5. Challenges in Gathering Audit Evidence:
o Auditors need clear and sufficient evidence to verify financial
records. If they face issues like:
 Lack of proper documentation (like missing receipts or
invoices).
 Big discrepancies between what the company reports and
what third parties (like banks or suppliers) confirm.
o These issues can make it difficult to assess the truthfulness of the
financial statements and increase the risk of undetected fraud or
errors

Auditor’s Duties and

Responsibilities in Respect of Fraud
1. Main Objective: The primary job of an auditor is to express an opinion
on whether the financial statements are accurate.
2. Considering Fraud Risks: While auditing, the auditor must look out for
the risk of significant mistakes in the financial statements that could be
due to fraud or errors.
3. Reasonable Assurance: Audits follow established standards to give
reasonable assurance that the financial statements are free from major
misstatements. However, an audit does not guarantee that all fraud or
errors will be found.
4. Not Responsible for Prevention: Auditors are not responsible for
preventing fraud or errors; they mainly check if the financial records are
correct.
5. Limitations of Detection: Just because a mistake is found later doesn’t
mean the auditor failed. Some frauds are cleverly hidden, making them
hard to detect even with proper auditing.
6. Planning and Inquiry: Auditors need to plan their audits carefully and
ask management about any known fraud or significant errors that
happened during the reporting period.
7. Adjusting Procedures: If there are signs of possible fraud or errors,
auditors may need to change their audit methods to gather more
evidence.
8. Communication: If the auditor finds any misstatements, they must
report these to the appropriate management level quickly. They may
also seek legal advice before taking further steps.
9. Impact on Financial Statements: If fraud is confirmed, the auditor must
ensure that it is reflected accurately in the financial statements. If errors
are found, they should be corrected.
10.Reporting: The auditor should discuss the implications of any fraud or
errors in their report. If significant fraud is found, it should be disclosed
in the financial statements. If necessary adjustments are not made, the
auditor should note this in their report.

BASIC PRINCIPLES OF AUDIT