a.

Fraudulent financial reporting:

i. Manipulation, falsification or alteration of accounting records or supporting documents from which financial statements are prepared;

ii. Misrepresentation in, or intentional omission from, the financial statements of events, transactions or other significant information; and

iii. Intentional misapplication of accounting principles relating to amounts, classification, manner of presentation or disclosure.

Misappropriation of assets:

i. Embezzling receipts;

ii. Stealing physical assets or intellectual property;

iii. Causing an entity to pay for goods and services not received; and

iv. Using an entity‟s assets for personal use.

b. The responsibility of the external auditor regarding the cash misappropriation in Demurin Supplies Limited external auditor is expected to perform in identifying risks due to fraud.

The auditor‟s responsibility is to obtain reasonable assurance that the financial statements taken as a whole are free from material misstatement whether caused by fraud or error.

The auditor is not responsible for preventing fraud or detecting all instances of fraud.

The auditor is responsible for maintaining professional scepticism throughout the audit, considering the potential for management override of controls and recognising the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud.

The auditor is responsible for identifying and assessing the risks of material misstatement due to fraud and designing and performing audit procedures responsive to those risks.

c. The procedure the external auditor is expected to perform in identifying risks due to fraud.

i. The auditor should make enquiries of management regarding management‟s assessment of the risk that the financial statements may be materially misstated due to fraud, including the nature, extent and frequency of such assessments;

ii. Management‟s process for identifying and responding to the risks of fraud in the entity, including any specific risks of fraud that management has identified or that have been brought to its attention, or classes of transactions, account balances, or disclosures for which a risk of fraud is likely to exist;

iii. Management‟s communication, if any, to those charged with governance regarding its processes for identifying and responding to the risks of fraud in the entity; and

iv. Management‟s communication, if any, to employees regarding its views on business practices and ethical behaviour.

v. The auditor should make enquiries of management, and others within the entity as appropriate, to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity.

vi. For those entities that have an internal audit function, the auditor should make enquiries of appropriate individuals within the function to determine whether they have knowledge of any actual, suspected or alleged fraud affecting the entity, and to obtain its views about the risks of fraud.

d. Fraud risk factors that can increase the likelihood of fraud happening in an organisation.

i. Incentives/Pressures: Financial stability or profitability is threatened by economic, industry, or entity operating conditions;

ii. Excessive pressure exists for management to meet the requirements or expectations of third parties;

iii. Information available indicates that the personal financial situation of management or those charged with governance is threatened by the entity‟s financial performance;

iv. There is excessive pressure on management or operating personnel to meet financial targets established by those charged with governance, including sales or profitability incentive goals;

v. Opportunities: The nature of the industry or the entity‟s operations provides opportunities to engage in fraudulent financial reporting;

vi. There is ineffective monitoring of management;

vii. There is a complex or unstable organisational structure;

viii. Internal control components are deficient;

ix. Attitudes/Rationalisations: Communication, implementation, support, or enforcement of the entity‟s values or ethical standards by management, or the communication of inappropriate values or ethical standards, are not effective;

x. Management fails to appropriately address known significant deficiencies in internal control on a timely basis;

xi. Management displays a significant disregard for regulatory authorities; and

xii. Management displays an overly aggressive attitude towards financial reporting.

e.  The management function that can control the risk of cash misappropriation as the organisation gets bigger.

The internal audit function can control the risk of cash misappropriation as the organisation gets bigger.