CFE Fraud Prevention and Deterrence Flashcards
According to the 2018 Report to the Nations, more frauds are uncovered by?
tips, internal audit, and management review
Under the restrictions imposed by the Sarbanes-Oxley Act, all audit committee members must?
be members of the board of directors and must be “independent,” meaning they receive compensation only for their service on the board.
Cressey’s Fraud Triangle teaches that there are three interrelated elements that enable someone to commit fraud:
the motive or pressure that drives a person to want to commit the fraud, the opportunity that enables him to commit the fraud, and the ability to rationalize the fraudulent behavior.
According to the requirements of the Sarbanes-Oxley Act, which of the following parties is responsible for establishing procedures to handle complaints regarding irregularities in a publicly traded company’s accounting methods, internal controls, or auditing matters?
The Audit Committee.
All occupational frauds fall into one of three major categories:
asset misappropriation, corruption, or financial statement fraud.
According to the 2018 Report to the Nations, which of the three major categories of occupational fraud has the highest median loss?
Financial Statement Fraud
The COSO/ACFE Fraud Risk Management Guide describes five broad principles of fraud risk management, one for each of the five interrelated components of internal control listed in COSO’s Internal Controls—Integrated Framework:
- fraud risk governance
- fraud risk assessment
- fraud control activities
- fraud investigation and corrective action-
- fraud risk management monitoring activities.
The two primary strategies to control corporate criminal behavior are:
Compliance and deterrence
PCAOB AS 2201 provides guidance for auditors on:
Performing an audit of an entity’s internal controls over financial reporting
AU Section 240 delineates two types of frauds that are relevant for audit purposes: those that involve intentional fraudulent financial reporting and those that involve the misappropriation of company assets.
True
The theory of differential association was developed by criminologist Edwin Sutherland. It states that:
(1) criminal behavior is learned;
(2) it is learned from other people in a process of communication;
(3) criminal behavior is acquired through participation with intimate personal groups;
(4) the learning process includes the shaping of motives, drives, rationalizations, and attitudes;
(5) the directions of motives are learned from the favorable or unfavorable interpretations of applicable laws;
(6) a person becomes a criminal because of an excess of conclusions favorable to violation of the law over conclusions unfavorable to violation of the law;
(7) differential association may vary in frequency, duration, priority, and intensity;
(8) learning criminal behavior involves all the mechanisms of other learning;
(9) learning differs from pure imitation; and
(10) while criminal behavior is an expression of general needs and values, it is not explained by these needs and values.
Organizational crime is that which is?
committed by businesses, particularly corporations, and the government. In contrast, occupational crime involves legal offenses committed by individuals in the course of their occupation. An antitrust offense, such as bid rigging or price fixing, would be an organizational crime; accepting or offering bribes is an occupational offense.
Organizational crime occurs in the context of complex relationships and expectations among boards of directors, executives, and managers on one hand, and among parent corporations, corporate divisions, and subsidiaries on the other.
Compliance is designed to
achieve conformity to the law without having to detect, process, or penalize violators. Compliance systems provide economic incentives for voluntary compliance to the laws and use administrative efforts to control violations before they occur.
deterrence is designed to
detect law violations, determine who is responsible, and penalize offenders to deter future violations. Deterrence systems try to control the immediate behavior of individuals, not the long-term behaviors targeted by compliance systems.
“The corporate governance structure specifies the ?
distribution of rights and responsibilities among the different participants in the organisation—such as the board, managers, shareholders and other stakeholders—and lays down the rules and procedures for decision-making.”
Information is material if
having knowledge of such information might reasonably be expected to influence a client’s or employer’s decisions based on a fraud examiner’s report.
An entity’s corporate culture is most effectively assessed using a checklist of initiatives to make sure all the elements of a strong tone at the top are in place? T/F
False.
A strong corporate culture can most often be observed by its outcome, rather than by any individual component. Fostering a culture of ethics and compliance runs deeper than simply implementing a checklist of initiatives; similarly, a culture of corruption can exist even in companies with seemingly sound policies in place.
The objective of anti-fraud controls is to
make the residual fraud risk significantly smaller than the inherent fraud risk.
Government Auditing Standards, also known as the Yellow Book, apply to which of the following types of engagements?
Government Review Engagements, Government Performance Audits and Government Financial Audits.
The Sarbanes-Oxley Act contains two provisions that establish broad protections for corporate whistleblowers:
- Section 806 of the Act creates a civil liability for an employer who, out of retaliation, fires, demotes, suspends, threatens, harasses, or discriminates against an employee who provided information or otherwise assisted in an investigation of fraudulent activity. Employees are also protected against retaliation for filing, testifying, participating, or otherwise assisting in a proceeding filed or about to be filed relating to an alleged violation of securities laws and regulations. It should be noted, however, that this provision only covers employees of publicly traded companies and therefore does not provide protection to all whistleblowers.
- Section 1107 establishes criminal sanctions for anyone who intentionally retaliates against another party for providing information regarding an alleged federal offense to a law enforcement officer. Unlike the civil liability, the protection provided under Section 1107 applies to all individuals, regardless of where they work.
As a strategy to control crime, compliance is designed to
achieve conformity to the law without having to detect, process, or penalize violators. Compliance systems provide economic incentives for voluntary compliance to the laws and use administrative efforts to control violations before they occur.
In its Internal Control—Integrated Framework, the Committee on Sponsoring Organizations (COSO) defines internal control as
“a process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.”
The risk of the auditor not detecting a material misstatement resulting from employee fraud is greater than the risk of the auditor not detecting a material misstatement resulting from management fraud.
T/F
False
The risk of the auditor not detecting a material misstatement resulting from management fraud is greater than for employee fraud because management is frequently in a position to directly or indirectly manipulate accounting records, present fraudulent financial information, or override control procedures designed to prevent similar frauds by other employees.
According to PCAOB AS 2201, auditors should implement a?
a top-down approach in performing an audit of internal controls over financial reporting.
As stated in Paragraph 21, a top-down approach “begins at the financial statement level and with the auditor’s understanding of the overall risks to internal control over financial reporting. The auditor then focuses on entity-level controls and works down to significant accounts and disclosures and their relevant assertions.”
