chap 10 conditions for fraud

Question 1

in assessing risk factors for misappropriation of assets, greater emphasis is placed on ____ incentives and opportunities for theft

Answer 1

individual

Question 2

what are 3 risk factors dealing with the incentive /pressures condition of the fraud triangle to commit FS fraud

Answer 2

1. 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

Question 3

what is a common incentive for employees who misappropriate assets?

Answer 3

financial pressures

Question 4

what are 2 risk factors dealing with the attitudes/rationalization condition of the fraud triangle to commit asset misappropriation?

Answer 4

1. 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

Question 5

why is fraud more prevalent in smaller businesses and not for profit organizations?

Answer 5

it can sometimes be more difficult for them to maintain adequate separation of duties

Question 6

although less frequent several notable cases of fraudulent financial reporting involved what?

Answer 6

inadequate disclosure

Question 7

what are the 3 most commonly cited fraud risk conditions dealing with incentives/Pressures condition in fraudulent FSs?

Answer 7

1. 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

Question 8

what are the 2 most commonly cited fraud risk conditions dealing with attitutes/rationalization condition in fraudulent FSs?

Answer 8

1. felt a sense of superiority 2. anger and fear

Question 9

the risk of misstatement of inventories is increased if those inventories are at risk for what?

Answer 9

obsolescence

Question 10

what are the 3 most commonly cited fraud risk conditions dealing with opportunities condition in fraudulent FSs?

Answer 10

1. due to weak internal controls 2. by circumventing existing controls 3. by colluding with others to override existing controls

Question 11

what are 2 risk factors dealing with the incentives/pressures condition of the fraud triangle to commit asset misappropriation?

Answer 11

1. 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

Question 12

misappropration of assets happens because of inadequate internal control over assets due to lack of what 4 things?

Answer 12

1. 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

Question 13

the _____ of top managment toward financial reporting is a critical risk factor in assessing the likelihood of fraudulent financial statements

Answer 13

attitude

Question 14

FS of all companies are potentially subject to maniulation but the risk is greater for companies in industries where what is involved? (2)

Answer 14

1. significant judgement 2. estimates

Question 15

opportunties for theft exists in all companies but are greater in companies that have what?

Answer 15

accessible cash, inventory, or other valuable assets especially if they are small or easily removed

Question 16

whta is the most often cited opportunity for FS misstatement due to fraud?

Answer 16

weak internal controls

Question 17

whenever employees have custody or temporary access to assets, the potential for theft exists if they alos maintain what?

Answer 17

the accouting records for those assets

Question 18

what is the most commonly cited condition related to attitude and rationalization?

Answer 18

a sense of superiority by executives

Question 19

in the fraud triangle, fraudulent financial reporting and misappropriation of assets share the same 3 conditions but what differs?

Answer 19

the risk factors

Question 20

an essential consideration by the auditor in uncovering fraud is identifying what?

Answer 20

factors that increase the risk of fraud

Question 21

T/F valuation of inventories is subject to greater risk of misstatment for companies with diverse inventories in many locations

Answer 21

T

Question 22

the 3 conditions for fraud arising from financial reporting and misappropriation of assets arereferred to as the ?

Answer 22

fraud triangle

Question 23

what are 2 risk factors dealing with the opportunities condition of the fraud triangle to commit asset misappropriation?

Answer 23

1. 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

Question 24

what are 3 risk factors dealing with the attitudes/rationalization condition of the fraud triangle to commit FS fraud

Answer 24

1. 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

Question 25

what is a common incentive for companies to manipulate financial statements?

Answer 25

a decline in the companys financial prospects

Question 26

managments attitude toward controls and eithical conduct may allow employees and managers to _____ theft of assets

Answer 26

rationalize

Question 27

what are 5 risk factors dealing with the opportunies condition of the fraud triangle to commit FS fraud

Answer 27

1. 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

Question 28

what are 2 reasons dissatisfied employees steal?

Answer 28

1. from a sense of entitlement 2. a form of attack against their employers

Question 29

T/F turnover in accounting personnel or other deficiencies in accountng and information processes doesn’t create an opportunity for misstatement

Answer 29

F

Question 30

what are the 3 conditions in the fraud triangle?

Answer 30

1. 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