You are the senior on an audit team for a large public company. This is your second year on the engagement and you have established a good working relationship with some of the client’s staff. Your firm has only been the independent auditor of this company for four years, and the company has a history of fraud prior to your firm’s involvement.
At lunch with some staff from the client, you overhear that Danilo, the long-time assistant controller for the company’s South America operations, has had problems paying his mortgage. He may even face foreclosure if he doesn’t find an opportunity for some supplemental income. Furthermore, through the fraud brainstorming meeting conducted at the beginning of the fiscal year’s audit, you learned that the South America division was thought to be responsible for the fraud in the past. Danilo and his department were even investigated by the internal audit department, but all prior investigations were inconclusive due to lack of evidence.
Upon reviewing the current year’s ICFR testing performed by a staff accountant working on the engagement, you see that the test results indicate that ICFR are effective. The audit plan for the financial statement audit relies on the operating effectiveness of controls for the entire fiscal year. The ICFR controls testing give no indication that the financial statement audit plan needs to be revised.

1. What are the 3 elements of the fraud triangle?
2. Are all of the elements necessary for Danilo to commit fraud present?
3. What should you do upon learning of this situation?
4. How do you feel about the possibility of increasing the level of investigation if it might end up in Danilo being exposed – even though you know the nature of his activities are not on a significant enough scale to have a material impact on the company’s financial outcomes?

  • CreatedJanuary 21, 2015
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