14.3 Fraud and the Fraud Risk Model (Fraud Triangle) Flashcards
How can a management accountant use the Fraud Triangle to identify and manage the risk of fraud?
A. The Fraud Triangle provides a model for explaining how persuasion, coercion, and conviction influence people to commit fraud.
B. The Fraud Triangle provides a model for explaining the pressures, rationalizations, and opportunities that influence people to commit fraud.
C. The Fraud Triangle provides a model for explaining the motives, means, and opportunities that influence people to commit fraud.
D. The Fraud Triangle provides a SOX-compliant model for examining the company’s internal control environment in terms of its risk of fraud.
B. The Fraud Triangle provides a model for explaining the pressures, rationalizations, and opportunities that influence people to commit fraud.
The Fraud Triangle is a model for explaining the factors that cause someone to commit fraud. It consists of three components: pressures, rationalizations, and opportunities.
Misappropriation of assets is most often perpetrated by
A. Employees.
B. Customers.
C. Suppliers.
D. Auditors.
A. Employees.
Employees who have fiduciary responsibilities for assets are most likely to steal them.
The fraud risk factor that may be mitigated by internal controls is
A. Rationalization.
B. Motive.
C. Pressure.
D. Opportunity.
D. Opportunity.
The opportunity for individuals to perpetrate a fraud can be mitigated by proper controls. Examples are appropriate oversight, segregation of duties, and the audit process itself.
A manufacturing entity, located in a sparsely populated region of the country, has a policy of leaving its raw material inventory warehouse doors open during normal business hours to optimize workflow. The controller for the entity has just noticed that some raw material inventory is missing. Using the Fraud Triangle model, the controller has determined that the entity’s policy most likely increases the risk of fraud by
A. Incentivizing employees to commit the fraud.
B. Increasing the ease of rationalization of the fraudulent activity.
C. Assisting employees to perceive a financial need.
D. Increasing the opportunity to commit the fraud.
D. Increasing the opportunity to commit the fraud.
The three elements of the Fraud Triangle are pressure, opportunity, and rationalization. Opportunity is the ability of a person not only to perpetrate but also to conceal fraud and is created by an absence of oversight, inadequate internal controls, or the lack of enforcement of controls. Leaving the warehouse doors open represents an inadequate internal control that increases the opportunity to commit fraud.
When none of the three fraud risk factors are present, an accountant
A. Can rule out the presence of fraud.
B. Should consider the likelihood of fraud to be high.
C. Should not rule out the presence of fraud completely.
D. Will likely search more diligently for fraud.
C. Should not rule out the presence of fraud completely.
Even when no factors are observed, an accountant cannot completely exclude the risk of fraud. Factors may be present but hidden from the accountant.
Which of the following are red flags indicating misappropriation of assets?
I. Unexplained budget variances
II. Poor supervision
III. Failure of certain employees to take vacations
A. I and II only.
B. II and III only.
C. I and III only.
D. I, II, and III.
D. I, II, and III.
Among other things, unexplained budget variances, poor supervision, and failure of certain employees to take vacations are red flags indicating misappropriation of assets.
A company has a strong internal control structure in its accounting department. It has a high degree of duty segregation, regular reconciliations, strict reviews, and comprehensive internal audits. A disgruntled fixed assets accountant has been contemplating the embezzlement of cash receipts processed by the accounts receivable department. The accountant plans to use these funds to sustain his gambling problem. Using the Fraud Triangle model, what is the best assessment of fraud risk for the company’s situation?
A. Low, because both opportunity and rationalization are absent.
B. Medium, because opportunity is absent.
C. Medium, because rationalization is absent.
D. High, because pressure, opportunity, and rationalization are all present.
B. Medium, because opportunity is absent.
The company’s fraud risk is medium even though it has effective internal control because both pressure and rationalization are present.
An employee is stealing office supplies and believes that everybody else is doing it. The fraud risk factor represented by the employee is
A. Opportunity.
B. Ability.
C. Rationalization.
D. Motive.
C. Rationalization.
Certain employee attitudes or rationalizations are often associated with acts of fraud, including believing everybody else is doing it.
Which of the following is the best description of embezzlement?
A. Employees diverting company funds for personal use.
B. Shoplifting at a large retail chain where a family member works.
C. Recording fictitious sales in order to receive a higher bonus.
D. Manipulating accounting records to reverse asset impairments.
A. Employees diverting company funds for personal use.
Embezzlement is the misappropriation of assets and applies to employees diverting company funds for personal use. Examples include stealing inventory, stealing cash, setting up fake vendors, billing the company for personal expenses in travel expense reports, accounts receivable fraud, and theft of company data.
All of the following are examples of the misappropriation of assets except
A. Expense account falsification.
B. Inventory theft.
C. Channel stuffing.
D. Vendor fraud.
C. Channel stuffing.
Misappropriation of assets is most often committed by employees and results from theft, embezzlement, or defalcation. Examples include stealing inventory, stealing cash, setting up fake vendors, billing the company for personal expenses in travel expense reports, accounts receivable fraud, and theft of company data. Channel stuffing is a type of fraudulent financial reporting that occurs when products are shipped to distributors that do not need the products and recorded as sales.
