SMP Committee Train the Trainers' Seminar in Kampala, Uganda, June 4, 2013

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Fraud Risk in Micro-Entity
Audits
Not an all-bad news story 
Phil Cowperthwaite
IFAC SMP Committee Member
Trainers’ Seminar
June 4, 2013
Kampala, Uganda

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Fraud Risk Areas in Micro-Entity Audits
• Limited size of the management team
• Weak or indifferent tone at the top
• Related party transactions
• Changes in business conditions
• Others specific to your region?

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Limited Size of the Management Team
• A strength and a weakness
• Management control vs. override
• Generally few lines of business
• Operations usually not complex
• Estimates usually not complex

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Possible Audit Responses
• Direct communication with/observation of senior
management
• Know the industry/business
• Staff the audit appropriately
• Work on site
• Review the general ledger for the year
• Do something unpredictable ISA 240.29(c)

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Weak or Indifferent Tone at the Top
• Strong interest in “getting it right” a big strength
• Weak management – independence issues?
• Management indifferent to financial reporting

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Possible Audit Responses
• Do you really want the business?
• Direct observation of senior management
• Know the industry/business
• Staff audits appropriately
• Work on site
• Assist management in FS preparation

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Related Party Transactions
• Understand the cultural norms
• Looking for high risk areas, not the everyday
• There may be sound business reasons
• Lack of complexity can help with identification

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Possible Audit Responses
• Heightened skepticism always needed
• Know the industry/business
• Know your client
• Discussion with senior management
• Direct observation of senior management
• Staff audits appropriately
• Work on site

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Changes in Business Conditions
• Management’s personal financial situation
• Changes in product demand/general economy
• Staff turnover/change in assignments
• Heightened skepticism needed
• Lack of complexity can help with identification

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Possible Audit Responses
• Skepticism needed
• Know the industry/business
• Know your client
• Discussion with senior management
• Direct observation of senior management
• Staff audits appropriately
• Work on site

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ISA 240 – A Great Place to Start
Appendix 1 – Examples of Fraud Risk Factors
Appendix 2 – Possible Audit Procedures to Address
Risks of Material Misstatement Due to Fraud
Appendix 3 – Examples of Circumstances that Indicate the
Possibility of Fraud
• Considerations at the assertion level
• Fraudulent Financial Reporting
• Misappropriation of assets

12. www.ifac.org/SMP