Final Exam Flashcards
What is Fraud?
- purposeful deceit designed to provide the perpetrator with unlawful gain or to deny a right to a victim
-Fraud Triangle: Opportunity, Pressure/Motive, and Rationalization
Fraud Triangle Opportunity:
A perceived opportunity to commit fraud, conceal it, or avoid being punished is the second element of the fraud triangle.
At least six major factors increase perceived or real opportunities for individuals to commit fraud within an organization.
At least Six major factors:
* Lack of internal controls that prevent and/or detect fraudulent behavior
* Inability to judge quality of performance
* Failure to discipline fraud perpetrators
* Lack of access to information or asymmetrical information
* Ignorance, apathy, or incapacity
* Lack of an audit trail
* Lack of segregation of duties
Fraud Triangle Pressure/Motive:
-Financial Pressures
-Vice Pressures
-Work-Related Pressures
-Other Pressures
Fraud Triangle Rationalization:
Most fraud perpetrators are first-time offenders who would not commit other crimes.
In some way, they must rationalize away the dishonesty of their acts:
-How the perpetrator justifies their actions…. So they do not feel bad about what they are doing.
4 legal elements of Fraud?
-Material False Statement :
Fraud involves the making of a false statement, representation, or omission of a material fact
-Knowledge that the statement was false (scienter):
The individual committing fraud must have knowledge of the falsity of the statement or act, or exhibit a reckless disregard for the truth
-Reliance of the victim on the false statement:
Fraud requires that the individual making the false statement or representation does so with the intent to deceive or induce another party to rely on the false information
-Damages resulting from the victim’s reliance on the false statement:The fourth element involves the victim’s reliance on the false statement or representation, which results in some form of injury or damage.
What is lapping ?
when an employee alters the financial records to hide cash stolen from the company
What is skimming?
taking cash “off the top” of the daily receipts of a business (or from any cash transaction involving a third interested party) and officially reporting a lower total
What is bad debt expense ?
bad debt expense is the amount that customers cannot pay, so the company writes those customer balances (that are due to the company) off
If someone is stealing money from customer accounts and writing those off as bad debt expense, then the bad debt expense may show an unusual increase. That means the company will not receive the payments that were due from the customers.
The red flags are the drastic increase that is unable to be explained and the attitude of the accounts receivable manager. Also, in this case, it would be good to talk to your manager about it and to see if they can get anywhere with the accounts receivable manager. It still does not indicate that fraud has occurred.
You would need to do more digging. For example, you could request to see the accounts and amounts that were written off, who they were written off by, and dates. Also an auditor cannot confirm nor deny that something is going on unless they have much more information.
What are internal controls?
- procedures that help your operations deter fraud and keep you in compliance with the law.
Internal controls that prevent or detect fraudulent behavior
-The control environment
-Management’s role and example
-Management communication
-Clear organizational structure
-Effective internal audit department
-Information and communication
-Control activities (procedures, processes) (includes segregation of duties)
What are preventive, detective, and corrective controls?
Preventive
Definition:These controls aim to prevent errors, fraud, or other irregularities from occurring in the first place.
- Preventive control:
-segregation of duties:Dividing responsibilities among different individuals to prevent any single person from having too much control over a transaction.
-Authorization and approval procedures:Establishing clear protocols for approving transactions, purchases, or other financial activities.
-Physical safeguards:Securing physical assets such as cash, inventory, or equipment through measures like locks, security cameras, or restricted access areas.
-Employee training and education:Securing physical assets such as cash, inventory, or equipment through measures like locks, security cameras, or restricted access areas.
What are preventive, detective, and corrective controls?
Detective
Definition:These controls are aimed at identifying errors, irregularities, or instances of fraud after they have occurred but before they result in significant financial harm.
-Reconciliation procedures: Comparing different sets of records (e.g., bank statements vs. internal records) to identify discrepancies.
-Regular audits: Conducting periodic reviews of financial transactions, processes, and controls to detect any anomalies or deviations from established norms.
-Exception reporting: Setting up systems to automatically flag unusual or suspicious transactions for further investigation.
-Data analytics: Using advanced data analysis techniques to detect patterns or trends indicative of fraud or errors.
What are preventive, detective, and corrective controls?
corrective controls
Definition:These controls are put in place to address and correct errors, irregularities, or instances of fraud that have been identified
-Adjusting entries: Making necessary adjustments to accounting records to correct errors or misstatements.
-Disciplinary actions: Taking appropriate disciplinary actions against employees who violate policies or engage in fraudulent activities.
-Process improvements: Identifying weaknesses or deficiencies in existing controls and implementing changes to prevent similar issues in the future.
-Restitution and recovery: Taking steps to recover losses incurred due to fraud or errors, such as pursuing legal action or insurance claims.
