Page 226 - COSO Guidance Book

How might fraudulent financial reporting occur? Many commercially available accounting
software packages allow the user to change beginning balances. An unscrupulous bookkeeper
might change the beginning balance of cash in bank to hide a theft. This would permit the bank
account balance to balance to the books and make it appear that the books are in order.

– Fraudulent nonfinancial reporting
Fraudulent nonfinancial reporting is defined in the framework as an intentional act designed to
deceive users of nonfinancial reporting, including sustainability reporting, health and safety, or
employment activity, that might result in reporting with less than the intended level of precision.

For example, a local charity, such as a food bank, might provide an erroneous report of a larger
number of clients served than were actually served when seeking funding from external sources
for expansion.

– Misappropriation of assets

Misappropriation of assets is defined in the framework as the theft of the entity’s assets where
the effect may cause a material omission or misstatement in the external financial reports.

AU-C section 240 states that misappropriation of assets involves the theft of an entity’s assets; it
is often perpetrated by employees in immaterial amounts. It also can be perpetrated by
management, who can override internal control and better disguise the theft. AU-C section 240
provides the following examples of how asset misappropriation can occur (examples of each
have been provided for illustrative purposes):

 Embezzling receipts

For example, at a local faith-based organization, the members who collect and count cash
receipts collude and steal some of the donations.

 Stealing physical assets or intellectual property
For example, during holiday periods, it is not uncommon for the office supply of clear tape to
become curiously depleted.

 Causing an entity to pay for goods and services not received
For example, a common scheme at many construction sites is for the site supervisor to
“employ” fictitious casual labor (e.g., cleanup crew) and then abscond with the fictional
workers’ compensation.
 Using an entity’s assets for personal use

For example, at a CPA firm, a member of the staff solicits his or her own clients and then uses
the firm’s equipment and tax software inappropriately to prepare these tax returns for a fee.
AU-C section 240 also states that misappropriation of assets is often accompanied by fictitious
documents to conceal the fact that the assets are missing or have been pledged without proper
authorization. For example, many vendor-billing frauds require the perpetrator to make fictitious
invoices.

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