5. Fraud Flashcards
Definition of fraud
Any and all means a person uses to gain an unfair advantage over another person.
Political Financial National security Health & comfort Personal economy
There are two categories of fraud, misappropriation of asset and fraudulent financial reporting.
Describe misappropriation of asset
Tip: control
Theft of company assets by employees e.g. embezzling, solve with internal control
What are the main contributing factor in most misappropriations
Tip: absence
It is the absence of internal controls and/or the failure to enforce existing internal controls.
There are two categories of fraud, misappropriation of asset and fraudulent financial reporting.
Describe fraudulent financial reporting
Defines as intentional or reckless conduct result in misleading financial statements.
Explain the reasons for fraudulent financial reporting
Management falsifies financial statements to deceive investors and creditors, increase a company’s stock price, meet cash flow needs, or hide company losses and problem
Describe the four actions to reduce fraudulent financial reporting
Tip: establish, identify, access and design
Establish environment that contributes to the integrity of the financial reporting process
Identify and understand factors that lead to fraudulent financial reporting
Access the risk of fraudulent financial reporting
Design and implement control
Explain the auditor’s responsibility to detect fraud from Statement on Auditing Standards (SAS) viewpoint
Tip: understand and susceptible
Understand fraud, how and why
Where the company’s financial statements are susceptible to fraud
Obtain information, testing company records, know the people
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What does the fraud triangle consist of?
Pressures
Opportunities
Rationalizations
Usually all three needs to be present to a degree for a person to commit fraud
Explain pressures
Financial situational, emotional (challenge, pride) or lifestyle (habit or addict) pressure the person to commit fraud
Explain opportunities
They can commit and conceal the fraud and convert to fraudulent item personal gains.
Explain rationalizations
A rationalization allows perpetrators to justify their illegal behavior, including justification, attitude and personal integrity.
How to minimizing fraud?
Tip: fraud triangle, climate, difficulty, detection methods, reduce amount if occurs.
Fraud can be prevented by elimination or minimizing one or more fraud triangle elements. So in short, implement a good system of internal controls
The organizations must create a climate that makes fraud less likely
Increase the difficulty of committing it
Improve detection methods
Reduce the amount lost if a fraud occurs.
Mention four categories that are threats to AIS
tip: fraud is one of them
Natural and Political disasters.
Software errors and equipment malfunctions.
Unintentional acts.
Intentional acts => fraud
