Final answer:
Auditors focus on fraudulent financial reporting, often committed by management, and misappropriation of assets, typically by employees. Financial crimes like fraudulent reporting impact many victims and can cause significant loss and mistrust in financial markets.
Step-by-step explanation:
In accordance with AU-C 240, an auditor is primarily concerned with two types of fraud during a financial statement audit: (1) fraudulent financial reporting and (2) misappropriation of assets. The key difference between these fraud types is that fraudulent financial reporting is typically perpetrated by individuals at higher levels of the organization, such as management or company executives, who have the power to manipulate reporting systems to alter financial statements deceptively. In contrast, misappropriation of assets more often involves theft or unauthorized usage of the company's resources by employees or other insiders and does not necessarily involve financial statement manipulation.
One might ponder why financial crimes, like fraudulent financial reporting, are considered less harmful than other types of crimes, as highlighted by Figure 7.2. These crimes are paradoxically seen as less deviant despite potentially impacting a broader victim base which can include shareholders, employees, customers, and the economic system at large. The rationale behind this perception could be due to the less direct and immediate visible impact financial crimes have compared to violent or personal crimes, yet the consequences of fraudulent financial reporting can be substantial, involving significant financial losses and erosion of trust in the capital markets.