Aspect | Error | Fraud |
Definition | Unintentional misstatement in the financial statements. | Intentional act to obtain an unjust or illegal advantage. |
Intent | No intent to deceive. | Deliberate deception. |
Common causes | Misunderstanding, clerical mistakes, misapplication of GAAP/MFRS, estimation mistakes. | Manipulation/forgery of records, misappropriation of assets, override of controls, fictitious transactions. |
Examples | Mis-keying RM 1,000 as RM 10,000; wrong depreciation rate applied by mistake. | Recording fake sales at period-end; paying ghost employees; hiding liabilities. |
Indicators (“red flags”) | Random, non-pattern mistakes; corrected when found. | Patterns favoring management targets, missing docs, unusual EoP journal entries, related-party transactions not disclosed, management override. |
Auditor’s response | Design procedures to detect material misstatements due to error; extend testing if error risk appears high. | Per ISA 240, presume risk of fraud in revenue recognition and management override; perform fraud-focused procedures (journal-entry testing, unpredictability, inquiries), consider whistleblower tips, increase professional skepticism. |
Consequences | Restatement/adjustment; control remediation. | Possible restatement and legal, regulatory, and governance repercussions; communicate to those charged with governance; consider withdrawal from engagement. |
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