chap 10 conditions for fraud Flashcards
in assessing risk factors for misappropriation of assets, greater emphasis is placed on ____ incentives and opportunities for theft
individual
what are 3 risk factors dealing with the incentive /pressures condition of the fraud triangle to commit FS fraud
- financial stability or profitability threated 2. excessive pressure for managment to meet debt repayment or other debt covenant requirements 3. mangement or board of directors personal net worth is materially threatened by the entitys financial performance
what is a common incentive for employees who misappropriate assets?
financial pressures
what are 2 risk factors dealing with the attitudes/rationalization condition of the fraud triangle to commit asset misappropriation?
- disregard for the need to monitor or reduce risk of misappropriating assets 2. disregard for internal controls by overriding existing controls or failing to correct known internal control deficiencies
why is fraud more prevalent in smaller businesses and not for profit organizations?
it can sometimes be more difficult for them to maintain adequate separation of duties
although less frequent several notable cases of fraudulent financial reporting involved what?
inadequate disclosure
what are the 3 most commonly cited fraud risk conditions dealing with incentives/Pressures condition in fraudulent FSs?
- to seek personal financial gain mostly to fund extravangant lifestyle, not to make “ends meet” 2. to meet prespecified business targets 3. because i can
what are the 2 most commonly cited fraud risk conditions dealing with attitutes/rationalization condition in fraudulent FSs?
- felt a sense of superiority 2. anger and fear
the risk of misstatement of inventories is increased if those inventories are at risk for what?
obsolescence
what are the 3 most commonly cited fraud risk conditions dealing with opportunities condition in fraudulent FSs?
- due to weak internal controls 2. by circumventing existing controls 3. by colluding with others to override existing controls
what are 2 risk factors dealing with the incentives/pressures condition of the fraud triangle to commit asset misappropriation?
- personal financial obligations create pressure for those with access to cash or other assets susceptible to theft to misappropriate those assets 2. adverse relationships between managment and employees with access to assets susceptible to theft motivate employees to misapproprate those assets
misappropration of assets happens because of inadequate internal control over assets due to lack of what 4 things?
- appropriate segregation of duties or independent checks 2. an approved vendor list to detect unauthorized or fictitious vendors 3. job applicant screening for employees with access to assets 4. mandatory vacations for employees with access to assets
the _____ of top managment toward financial reporting is a critical risk factor in assessing the likelihood of fraudulent financial statements
attitude
FS of all companies are potentially subject to maniulation but the risk is greater for companies in industries where what is involved? (2)
- significant judgement 2. estimates
opportunties for theft exists in all companies but are greater in companies that have what?
accessible cash, inventory, or other valuable assets especially if they are small or easily removed
whta is the most often cited opportunity for FS misstatement due to fraud?
weak internal controls
whenever employees have custody or temporary access to assets, the potential for theft exists if they alos maintain what?
the accouting records for those assets
what is the most commonly cited condition related to attitude and rationalization?
a sense of superiority by executives
in the fraud triangle, fraudulent financial reporting and misappropriation of assets share the same 3 conditions but what differs?
the risk factors
an essential consideration by the auditor in uncovering fraud is identifying what?
factors that increase the risk of fraud
T/F valuation of inventories is subject to greater risk of misstatment for companies with diverse inventories in many locations
T
the 3 conditions for fraud arising from financial reporting and misappropriation of assets arereferred to as the ?
fraud triangle
what are 2 risk factors dealing with the opportunities condition of the fraud triangle to commit asset misappropriation?
- presence of large amounts of cash on hand or inventory items that are small, of high value, or are in high demand 2. inadequate internal control over assets
what are 3 risk factors dealing with the attitudes/rationalization condition of the fraud triangle to commit FS fraud
- inappropriate or ineffective communication and support of the entitys values 2. know history of violations of securities laws or other laws and regulations 3. managments practice of making overly agressive or unrealistic forecasts to analysts, creditors, or other third parties
what is a common incentive for companies to manipulate financial statements?
a decline in the companys financial prospects
managments attitude toward controls and eithical conduct may allow employees and managers to _____ theft of assets
rationalize
what are 5 risk factors dealing with the opportunies condition of the fraud triangle to commit FS fraud
- significant accounting estimates involve subjective judgements or uncertainties that are difficult to verify 2. ineffective board of director or audit committee oversight over financial reporting 3. high turnover or ineffective accounting , internal audit, or information technology staff 4. deficient internal controls 5. significant related party transactions
what are 2 reasons dissatisfied employees steal?
- from a sense of entitlement 2. a form of attack against their employers
T/F turnover in accounting personnel or other deficiencies in accountng and information processes doesn’t create an opportunity for misstatement
F
what are the 3 conditions in the fraud triangle?
- incentives/pressure- managment or other employees have incentives or pressure to commit fraud 2. opportunities- circumstances provide opportunities to commit fraud 3. attitues/rationalization- an attitude , character, or set of ethical values exists that allows someone to commit a dishonest act, or they are in an environment that imposes sufficient pressure that causes them to rationalize committing a dishonest act
