a. Employee fraud is misappropriation of assets. Of course, the theft of assets such as cash, inventory, or equipment is also fraud. Paying personal expenses out of the company checking account is fraud. Another example is taking company computers home to use personally. Misstatements due to fraudulent financial reporting: In this type of fraud, management or owners are usually involved, and the fraud is facilitated by overriding internal controls B. During planning, Auditors must assess the risk of material misstatement whether caused by errors or fraud. Based on this risk assessment, the remainder of the audit is planned so that reasonable assurance is achieved. Due care and professional skepticism in1) planning, 2) collecting evidence and 3) evaluating evidence C. For direct effect illegal acts (those that would have a direct impact on the F/S), the auditors have the same responsibility as they do for errors and fraud. For indirect effect illegal acts, auditors have no responsibility for planning for, managing the risk of, etc. But often audit procedures (i.e. reading the minutes of Board of Directors meetings, discussions with client's attorneys, etc)., may indicate that it is likely illegal acts (direct or indirect effect) have occurred. Auditor must follow up on these, get to the bottom of it, discuss it with client's attorneys, top management, and the audit committee of the BOD. If illegal act has occurred, auditors must be satisfied that appropriate remedial action has been taken. If not, withdraw from the engagement.