7. Fraud Risks & Controls (10% 12 MCQs)

Question 1

Section A - Proficient

Types of Fraud Risk
Definition

Fraud Risk & Types

Answer 1

Fraud is an illegal act involving
* deceit,
* concealment, or
* breach of trust.

Question 2

Section A - Proficient

Types of Fraud Risk
Characteristics

Fraud Risk & Types

Answer 2

1. Pressure: Personal needs drive the fraud.
2. Opportunity: Control weaknesses enable it.
3. Rationalization: Justifying the fraud to oneself.

Question 3

Section A - Proficient

Types of Fraud Risk
Effects of Fraud

Fraud Risk & Types

Answer 3

Full cost is hard to measure but usually results in significant financial losses.

Question 4

Section A - Proficient

Types of Fraud Risk

Fraud Risk & Types

Answer 4

1. Asset Misappropriation: Stealing cash or assets.
2. Skimming: Taking cash before it’s recorded.
3. Payment Fraud: Paying for non-existent goods or services.
4. Expense Fraud: Claiming fake or inflated expenses.
5. Payroll Fraud: Claiming false compensation.
6. Financial Misrepresentation: Altering financial statements.
7. Information Misrepresentation: Providing false info.
8. Corruption: Abusing power for personal gain.
9. Bribery: Receiving kickbacks.
10. Conflict of Interests: Compromised decision-making.
11. Diversion: Redirecting funds improperly.
12. Wrongful Use: Misusing information.
13. Related Party Fraud: Fraud involving related entities.
14. Tax Evasion: Illegally avoiding taxes.

Question 5

Section A - Proficient

Types of Fraud Risk
Symptoms of Fraud

Fraud Risk & Types

Answer 5

1. Documentary: Fake or altered documents.
2. Lifestyle: Unusual changes in social status or spending.
3. Behavioral: Signs of guilt or stress in behavior.

Question 6

Section B - Proficient

Fraud Red Flags
Fraud Indicator (Red Flags)

Fraud Risk & Types

Answer 6

1. No employee rotation, unclear roles, or lack of duty segregation.
2. Control overrides and unusual sales or production goals.
3. Employees avoiding vacations and high profits despite downturns.
4. Sole sourcing, mismatched product requisitions, and disproportionate sales vs. costs.
5. Petty cash mishandling.

Question 7

Section C - Proficient

Fraud Awareness & Control
Fraudulent Processes

Fraud Risk & Types

Answer 7

• Lapping Receivables: Stealing customer payments and covering the shortage with payments from other customers.
• Check Kiting: Issuing checks without sufficient funds and covering the shortfall before detection, exploiting delays in check clearing

Question 8

Section C - Proficient

Fraud Awareness & Control
Fraud Management Program/ Control

Fraud Controls

Answer 8

1. Ethics Policy: Define company ethics.
2. Awareness: Educate employees about fraud.
3. Risk Assessment: Regularly assess fraud risks.
4. Reviews: Conduct ongoing reviews.
5. Prevention & Detection: Implement measures to prevent and detect fraud.
6. Investigation: Investigate suspected fraud

Question 9

Section C - Proficient

Fraud Awareness & Control
Fraud Controls

Fraud Controls

Answer 9

Use the COSO framework to address fraud.

Question 10

Section C - Proficient

Fraud Awareness & Control
Responsibilities

Fraud Controls

Answer 10

1. Management: Primarily responsible for controls.
2. Auditor: Evaluates, assesses, and recommends improvements.

Question 11

Section C - Proficient

Fraud Awareness & Control
Fraud Awareness

Fraud Controls

Answer 11

• Periodic training
• Risk assessment
• Ongoing communication

Question 12

Section D – Basic

Forensic Auditing (IA Role)
Forensic Auditing Definition

Fraud Investigation

Answer 12

• Uses audit and accounting skills
• Important for civil and criminal legal implication
• Internal auditors, lawyers, and other specialists usually conduct fraud investigation

Question 13

Section D - Basic

Forensic Auditing (IA Role)
Role of IA

Fraud Risk & Types

Answer 13

1. Fraud Risks: Identify potential fraud risks.
2. Knowledge: Understand fraud risks, not act as investigators.
3. Assessment: Conduct risk assessments and evaluate controls.
4. Indicators: Recognize fraud indicators.
5. Recommendations: Suggest further investigations

Question 14

Section D – Basic

Forensic Auditing (IA Role)
Fraud Investigation

Fraud Investigation

Answer 14

1. Management: Set policies, handle evidence, and communicate.
2. Auditors: Follow defined roles.
3. Team: Know fraud, methods, laws.
4. Investigator: Assign skills.
5. Evidence: Record, secure, and maintain chain.
6. Coordination: Collaborate with management and legal.

Question 15

Section D – Basic

Forensic Auditing (IA Role)
Employee Interogation

Fraud Investigation

Answer 15

1. Fraud Interviews: Specific and detailed.
2. Internal Audit: Starts broad, then narrows focus.
3. Employee: Suspended during investigation.

Question 16

Section D – Basic

Forensic Auditing (IA Role)
Fraud Reporting

Fraud Investigation

Answer 16

• CAE: Manages fraud reporting.
• Draft: Reviewed by legal counsel.
• Report: Significant fraud must be reported to senior management and the board.

Question 17

Section D – Basic

Forensic Auditing (IA Role)
Resolution of Fraud Incident

Fraud Investigation

Answer 17

Responsibility: Management and Board resolve fraud incidents.
Actions:
1. Close innocent cases.
2. Discipline, seek restitution.
3. Terminate contracts, report to law enforcement.
4. File suits, claims, and recommend control improvements.

Question 18

Section D – Basic

Forensic Auditing (IA Role)
Communication of Fraud Incident

Fraud Investigation

Answer 18

Management and Board decide how to communicate fraud incidents to outsiders.

Question 19

Section D – Basic

Forensic Auditing (IA Role)
Opinion on Fraud Related Controls

Fraud Investigation

Answer 19

The Board may request the internal auditor’s opinion on fraud-related internal controls.