Question

"In accordance with AU-C 240, Consideration of Fraud in a Financial Statement Audit, fraud risk factors may come to the auditor's attention while performing procedures related to:

I. engagement planning.
II. understanding an entity's internal control.
III. conducting fieldwork."

Answer 1

Fraud risk factors may be noticed by an auditor during engagement planning, while understanding an entity's internal control, and during conducting fieldwork. Knowledge of statistics and data analysis is important in detecting these risks and anomalies.

Step-by-step explanation:

The student's question pertains to the acknowledgment of fraud risk factors during different phases of an audit in accordance with AU-C 240, Consideration of Fraud in a Financial Statement Audit. Fraud risk factors may indeed become evident at various times throughout the audit process. Specifically, the auditor might encounter these risk factors:

1. Engagement planning: This initial phase involves preparing for the audit, during which inherent risks, including the risk of fraud, are assessed.
2. Understanding an entity's internal control: By examining the entity's internal controls, an auditor may identify weaknesses that could indicate susceptibility to fraud.
3. Conducting fieldwork: As the auditor collects and evaluates evidence, anomalies or inconsistencies may emerge that suggest the presence of fraud.

An understanding of statistics and data analysis is crucial, as the lack of such knowledge can result in failure to recognize irregularities, as evidenced by the investigation into Stapel's fraud. Auditors should possess a firm grasp of data collection and reporting methods to effectively identify fraud risks.