a.

1. Payment Fraud

This type of fraud involves falsely creating or diverting payments. Examples include creating fake records and bank accounts which enable the fraudulent payments to be made. Other examples include generating false payments, making fraudulent payments to oneself, intercepting and altering payee details, and amounts on cheques and other forms of payment order and attempting to then bank those payments and processing false claims by accomplices for later repayments.

2. False Accounting Fraud

This type of fraud involves the alteration of the way in which company accounts are presented so that they do not reflect the true value or financial activities of the company. This fraud commonly includes the overstating of assets and/or understanding of liabilities. False accounting may be undertaken for a variety of reasons, often to obtain additional financing or to report unrealistic profits and/or to inflate the share price.

3. Procurement Fraud

Procurement is the process of acquisition from third parties and covers the acquisition of goods, services and construction projects. Procurement fraud often involves collusion to perpetrate a fraud covering tendering irregularities, the rigging of bids or claims for payment – often in relation to goods (and sometimes services) that were not delivered or are inferior to what was specified as the order.

b.

Responsibilities of directors

The tone of corporate governance is set by the board of directors and the senior management whose duty is:

• Formulation and implementing business ethics policy;
• To understand and identify fraud risks;
• Design and implement an effective risk management program;
• Monitor the fraud risk management program;
• Establish and monitor internal controls;
• Conduct periodic review of the risk management program to assess its effectiveness;
• Engaging external experts for independent review; and
• Ability to showcase the evidence of active involvement by the board of directors and the senior management as a part of the risk management program.

Responsibilities of auditor

Presume improper revenue recognition is a fraud risk. The vast majority of fraudulent financial reporting schemes involved improper revenue recognition. SAS no. 99 states that you “should ordinarily” presume there is risk of material misstatement due to fraud relating to revenue recognition. If you do not identify improper revenue recognition as a risk of material misstatement due to fraud, you should document the reasons supporting this conclusion.

Always identify the risks of management override of controls as a fraud risk. Those who have studied fraudulent financial reporting have noted that risk of management override is unpredictable, and, therefore, it is difficult for auditors to design procedures to identify and assess it. For that reason, management override always should be addressed in the design of audit procedures.