4-2. Auditors should plan and perform their audits to provide reasonable assurance of detecting material misstatements in financial statements, including those resulting from fraud.

Required:

a. Distinguish between fraudulent financial reporting and misappropriation of assets.

b. Describe the three fundamental conditions necessary for the commission of fraud. Provide an illustration of these three conditions for a case of fraudulent financial reporting.

c. Describe the three ways in which the auditors may respond to fraud risks in an audit.