Ch 4 Flashcards
Enterprise risk management (ERM)
Facilitate assessment and mitigation of business risks that
Entity faces
Management, boards and personnel have to assess what can go
Wrong with business and how to prevent it
Business risks
Risk that could adversely affect companies’ ability to achieve
Objectives and execute strategies
Inherent risk
In absence of internal controls
Risk frauds and errors can occur through information processing
And financial statements are misstated
Information risk
Probability that information distributed by entity will be materially
False and misleading
Control risk
Management builds in controls so errors and fraud are less likely
To occur,
but there is risk internal controls will fail to detect fraud or error
Audit risk
Risk of incorrect audit opinion when financial statements are
Materially misstated
8 elements of ERM (enterprise risk management framework)
1 internal environment 2 objective setting 3 event identification 4 risk assessment 5 risk response 6 control activities 7 information and communication 8 monitoring
ERM: internal environment define, what 4 items does it include?
Risk consciousness of organization
Includes organization’s risk management philosophy and risk
Appetite, ethical values, operating environment
ERM: Objective setting
Managements responsibility to determine goals and objectives of
Organization
ERM: event identification, define, examples
Identification of conditions and events that could adversely
Affect management’s objectives
Ex. Supplier problems, poor weather
ERM: risk assessment, define, example
Systematic process for estimating likelihood of adverse conditions
Occurring
Ex. Chance of Bad weather and financial damage it might cause
ERM: risk response
How organization will prevent of respond to adverse conditions
If they actually occur
ERM: control activities
Policies/procedures to ensure risk responses are appropriate
Given circumstances
ERM: information and communication
Link all components of ERM
Ex. Provide management with all info to minimize/eliminate risk
ERM: monitoring
Regular management and supervisory activities over risk
Management activities
to make sure they remain in place and operate smoothly
3 ways management can mitigate risk
1 avoid it
2 control it
3 share it
Fraud
Act of knowingly making material misrepresentation of fact
With intent of inducing someone to believe in falsehood and
Act on it, suffering a loss or damage
3 ways fraud and aggressive financial reporting occur
1 overstating revenues and assets
2 understating expenses and liabilities
3 giving disclosures that are misstated or omit important info
Fraud that affect financial info and causes financial statements to be materially misstated often arise from need to…
Get through difficult period
3 Examples of difficult periods where fraud occurs
1 cash shortage
2 increase in competition
3 cost overruns
Management fraud AKA fraudulent financial reporting
Deliberate fraud committed by management that injures investors
And creditors through materially misstated info
White collar crime
Fraud perpetrated by people who work in offices and steal
With pencil or computer
Not through violence
Employee fraud
Use of fraudulent means to misappropriate funds or other
Property from an employer
3 phases of employee fraud
1 fraudulent act
2 conversion of funds/property to fraudster’s use
3 coverup
Embezzlement
Type of fraud involving employees or non employees wrongfully
Misappropriating funds or property entrusted to their care
Often accompanied by false accounting entries and other
Forms of deception and coverup
Larceny
Simple theft
Stealing what hasn’t been entrusted to you
Defalcation
Another name for employee fraud, embezzlement or larceny
Misappropriation of assets
