Misappropriation of Assets
Definition
The second ISA 240 fraud category. It involves theft or misuse of an entity's assets by employees or management: cash skimming, expense reimbursement fraud, inventory theft, or payroll manipulation. Individual instances may be immaterial, but cumulative amounts or systemic schemes can reach material levels.
- Standard reference
- ISA 240, second fraud category
- Examples
- Cash skimming, expense fraud, inventory theft, payroll manipulation
- Perpetrators
- Employees or management
- Materiality note
- Individual instances may be immaterial, cumulative schemes may not
Common questions
How does misappropriation of assets differ from fraudulent financial reporting under ISA 240?+
Fraudulent financial reporting involves intentional misstatement of the financial statements themselves, typically by management, to mislead users. Misappropriation of assets is theft or misuse of the entity's resources for personal gain, which may or may not require any misstatement of the reported figures to conceal it.
Why does ISA 240 treat misappropriation as material even when individual amounts are small?+
A single skimmed transaction may be immaterial in isolation, but a systemic scheme repeated over months or years, or spread across many employees, can aggregate to a materially significant loss, and auditors are required to assess the cumulative and systemic risk, not just isolated instances.
What internal control weaknesses typically enable asset misappropriation schemes?+
Common enablers include inadequate segregation of duties, weak authorisation controls over disbursements, poor physical safeguarding of inventory or cash, and insufficient reconciliation or oversight, all of which auditors evaluate when assessing fraud risk in this category.
Related terms
- Audit Expectation Gap
- The difference between what auditing standards require auditors to do and what the public, investors, or regulators believe auditors are responsible for....
- Fraudulent Financial Reporting
- One of the two ISA 240 fraud categories. It involves intentional misstatement or omission in financial statements to deceive users: overstating revenues,...
- ISA 240
- International Standard on Auditing 240, 'The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements,' issued by the IAASB. Sets...
- Material Misstatement Due to Fraud
- A misstatement in the financial statements caused by intentional act (fraud rather than error) that is large enough, individually or collectively, to...
- Professional Skepticism
- An attitude requiring the auditor to question information, remain alert to conditions that may indicate misstatement, and critically assess audit evidence rather...