ACCT6007 Chap.4 Fraud Risk and Going Concern
Fraud Risk and Going Concern
This chapter separates fraud indicators from proof and financial stress from a final going-concern conclusion. Fraud work connects pressure, opportunity and rationalisation to accounts, assertions and procedures while preserving management's primary responsibility for prevention and detection.
Going-concern work evaluates management's assessment, corroborates plans, tests sensitivity, reviews disclosure and then considers the reporting consequence. Fraud differs from error through intention, but the auditor does not make the legal determination that fraud occurred. Pressure, opportunity and rationalisation are risk factors that inform a sceptical response.
Revenue recognition and management override require particular attention, including journal-entry testing, estimate review and examination of unusual transactions. Concealment, collusion and override explain why reasonable assurance is not a guarantee. Going concern begins with conditions such as recurring losses, cash shortages, maturing debt or supplier withdrawal. Management's plans need evidence, not hopeful wording.
Lender correspondence, contracts, board actions, later trading, forecast assumptions and sensitivity analysis help the auditor assess feasibility. Only after that work can the auditor evaluate the basis, material uncertainty, disclosure and report effect. Communication with those charged with governance matters in both topics.
Suspected fraud, management involvement or serious control weakness may alter the reliability of representations. Going-concern discussion should expose assumptions and uncertainty rather than compress them into one optimistic forecast. An appropriate basis with adequate disclosure leads to different reporting analysis from an inappropriate basis or inadequate disclosure.
An unmodified opinion is not a promise of survival, just as a fraud risk factor is not a legal finding. Separate observed conditions, inference, evidence and conclusion.
What this chapter covers
- 01
Fraud and error
- 02
Fraud risk factors
- 03
Management override
- 04
Going-concern conditions
- 05
Forecast and plan evidence
- 06
Disclosure and reporting
Worked example · free
Evaluate an unsupported turnaround plan
- 1Identify liquidity and refinancing conditions that may cast doubt.
- 1Inspect lender communication, sale evidence and board-approved action.
- 1Test forecast assumptions and adverse sensitivities.
- 1Assess basis, material uncertainty, disclosure and reporting consequence.
Key terms
- Fraudulent reporting
- Intentional misstatement or omission designed to deceive financial-report users.
- Misappropriation
- Theft or misuse of an entity's assets.
- Management override
- Management's ability to bypass controls that otherwise appear effective.
- Fraud triangle
- Pressure, opportunity and rationalisation considered as fraud risk factors.
- Material uncertainty
- Significant uncertainty that may cast substantial doubt on going concern.
- Sensitivity analysis
- Testing how forecast conclusions change when assumptions worsen.
Fraud Risk and Going Concern FAQ
Does a fraud risk factor prove fraud?
No. A factor heightens risk and prompts a sceptical response, but it is not proof that an intentional act occurred. Link the factor to an account and assertion, then obtain evidence capable of supporting or refuting the suspected misstatement.
Does financial stress make the going-concern basis wrong?
Not automatically. The auditor evaluates management's assessment and plans, supporting evidence, forecast sensitivity and disclosures. The basis may remain appropriate even when a material uncertainty needs clear disclosure and a specific section in the auditor's report.
Who is responsible for preventing fraud?
Management and those charged with governance hold primary responsibility through culture and controls. The auditor seeks reasonable assurance about material misstatement due to fraud or error, while recognising that concealment, collusion and override make fraud harder to detect.
Exam move
For fraud cases, write the risk factor, account, assertion and procedure in separate lines. For going-concern cases, use the sequence condition, management plan, corroboration, sensitivity, disclosure and report. Remove any sentence claiming an indicator proves fraud or that an unmodified opinion guarantees survival.
Practise one management-override scenario involving manual journals and one revenue scenario involving cut-off or fictitious sales. For each, name the account direction and explain why the chosen procedure could detect that error. Then build a cash-flow scenario with refinancing, asset disposal and cost reductions. List the independent evidence needed for each plan and change one assumption to see whether headroom disappears.
Keep an effective going-concern basis distinct from adequate disclosure of a material uncertainty. Do not jump from financial stress directly to a modified opinion. During review, mark every sentence as observation, inference or conclusion. If an inference lacks evidence, state the extra procedure.
End with a conditional reporting consequence tied to basis and disclosure rather than an absolute prediction about the entity’s future. Alternate fraud and going-concern cases during retrieval so pressure, opportunity and rationalisation are not confused with liquidity indicators. For each response, name the earliest additional fact that would change your conclusion.
This prevents hindsight from turning a risk indicator into a certainty. Test each management plan against independent evidence and one adverse sensitivity.
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