Two types of intentional misstatements in financial reporting

As per SA-240, “Auditor’s Responsibility to Consider Fraud and Error in an Audit of Financial Statements”, two types of intentional misstatements are relevant to the auditor’s consideration of fraud-misstatements:

(i) Fraudulent  Financial Reporting: It involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users. 

1. Fraudulent financial reporting may involve:

•  Deception such as manipulation, falsification, or alteration of accounting records or supporting documents from which the financial statements are prepared. For example, in a period of rising prices, sales contract documents may be ante-dated to record sales at prices lower than the prices at which sales have actually taken place.

•  Misrepresentation in, or intentional omission from, the financial statements of events, transactions or other significant information. For example, goods sold may not be recorded as sales but included in inventories.

•   Intentional misapplication of accounting principles relating to measurement, recognition, classification, presentation, or disclosure. For example, where a contracting firm follows the ‘completed contract’ method of accounting but does not provide for a known loss on incomplete contracts.

2.  Misappropriation of Assets: It involves the theft of an entity’s assets. Misappropriation of assets can be accomplished in a variety of ways (including embezzling receipts, stealing physical or intangible assets, or causing an entity to pay for goods and services not received); it is often accompanied by false or misleading records or documents in order to conceal the fact that the assets are missing.
 

Therefore, it is clear from the above that the ‘fraud’ deals with intentional misrepresentation but, ‘error’, on the other hand, refers to unintentional mistakes in financial information.