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Fraud Acct > Test 1 > Flashcards

Test 1 Flashcards

1
Q

Fraud Triangle (3 aspects):

A

-Motive/Pressure
-Opportunity
-Rationalization

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2
Q

Legal elements of Fraud

A

-Material false statement
-Knowledge that the statement was false (scienter)
-Reliance of the victim on the false statement
-Damages resulting from the victim’s reliance on the false statement

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3
Q

Fraud is deception that includes the following elements:

A
  1. A representation
  2. About a material point
  3. Which is false
  4. And intentionally or recklessly so
  5. Which is believed
  6. And acted upon by the victim
  7. To the victim’s damage
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4
Q

True or False: Fraud is different from unintentional errors.

A

True

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5
Q

True or False: Negligence is different from fraud because it lacks “intent

A

True

-Negligence is when they should have known better, but were negligent and did not do something correctly.

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6
Q

Criminal Law

A
  • Branch of law that deals with offenses of a public nature
  • Criminal laws :
    -Generally deal with offenses against society as a whole
    -Prosecuted either federally or by a state for violating a statute that prohibits some type of activity
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7
Q

Civil Law

A
  • Body of law that provides remedies for violations of private rights
  • Deals with rights of individuals
  • Civil claims:
    -Begin when one party files a complaint against another, usually for the purpose of gaining financial restitution
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8
Q

Fraud-Related Careers

A
  • Accounting professionals
  • Corporate security officers
  • Expert witness
  • Government inspectors
  • Independent consultant
  • Internal auditors
  • Investigators
  • Law enforcement
  • Lawyers
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9
Q

Who commits Fraud?

A
  • Anyone can commit fraud.
  • Fraud perpetrators usually can’t be distinguished from other people on the basis of demographic or psychological characteristics.
  • Most employees, customers, vendors, and business associates and partners fit the profile of fraud perpetrators and are capable of committing fraud.
  • It is impossible to predict in advance which employees, vendors, clients, customers, and others will become dishonest.
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10
Q

Fraud Triangle: Pressure/Motive

A
  • Financial Pressures
  • Vice Pressures
  • Work-Related Pressures
  • Other Pressures
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11
Q

Fraud Triangle: Opportunity

A
  • 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

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12
Q

Fraud Triangle: Rationalization

A
  • 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.

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13
Q

Common rationalizations used by fraud perpetrators include the following:

A
  • The organization owes me.
  • I am only borrowing the money and will pay it back.
  • Nobody will get hurt.
  • I deserve more.
  • It’s for a good purpose.
  • We’ll fix the books as soon as we get over this financial difficulty.
  • Something has to be sacrificed—my integrity or my reputation.
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14
Q

Internal controls that prevent or detect fraudulent behavior

A
  • 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)
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15
Q

Segregation of duties

A
  • Generally, the primary incompatible duties that need to be segregated are:
  • Authorization or approval.
  • Custody of assets.
  • Recording transactions.
  • Reconciliation.
  • System of authorizations
  • Independent checks
  • Physical safeguards
  • Documents and records
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16
Q

Five type of control activities

A
  • Separation of duties
  • Authorizations
  • Physical controls
  • Independent checks
  • Documents and records.

-First three activities (S A P) are the control activities that prevent fraud from occurring but are often the most expensive to implement.

-Last two activities (I D) don’t prevent fraud but are instead detective controls that help catch or detect fraud before it gets too large.

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17
Q

Fraud Prevention

A

-Preventing fraud is generally the most cost-effective way to reduce losses from fraud.

-Assessing the risks for fraud and developing concrete responses to mitigate the risks and eliminate the opportunities for fraud

-Organizations can proactively eliminate most fraud opportunities.

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18
Q

Effective Fraud Prevention involves:

A

-Taking steps to create and maintain a culture of honesty and high ethics
* Tone at the top (proper modeling)
* Hiring the right kind of employees
* Communicating expectations of honesty and integrity
* Creating a positive work environment
* Proper handling of fraud and fraud perpetrators when fraud occurs

19
Q

Fraud Prevention: Ways to assess and mitigate the risk of fraud

A

o Accurately identifying sources and measuring risks
o Implementing appropriate preventive and detective controls to mitigate those risks
o Creating widespread monitoring by employees
o Having internal and external auditors who provide independent checks on performance

20
Q

Fraud Detection

A

o Detection of fraud usually begins by identifying symptoms, indicators, or red flags that tend to be associated with fraud.

21
Q

3 primary ways to detect fraud:

A

-By chance

-By providing ways for people to report suspicions of fraud

-By proactively examining transaction records and documents to determine if there are anomalies that could represent fraud

22
Q

Prediction

A

-Predication refers to the circumstances, taken as a whole, that would lead a reasonable, prudent professional to believe a fraud has occurred, is occurring, or will occur.

-Fraud investigations should not be conducted without predication.

-A specific allegation of fraud against another party is not necessary, but there must be some reasonable basis for concern that fraud may be occurring.

23
Q

Fraud Investigation:

Once predication is present, an investigation is usually undertaken to determine whether or not fraud is actually occurring

A

~The purpose of an investigation is to find the truth.

~Do the symptoms observed actually represent fraud or do they represent unintentional errors or other factors?

24
Q

Fraud Investigation:

If investigations are not properly conducted, any or all of the following might occur

A

-Reputations of innocent individuals can be irreparably injured.

-Guilty parties can go undetected and be free to repeat the act.

-Offended entity may not have information to use in preventing and detecting similar incidents or in recovering damages.

25
Q

Fraud Investigation: Conducting a Fraud investigation

A

-Investigations must be undertaken only to “establish the truth of the matter under question.”

-Investigators must be experienced and objective.

-Hypothesis about whether or not someone committed fraud should be closely guarded when discussing an investigation with others.

-Investigators must ensure that only those who have a need to know are kept apprised of investigation activities.

-Investigators must ensure that all information collected during an inquiry is independently corroborated.

-Investigators must exercise care to avoid questionable investigative techniques.

-Investigators must report all facts fairly and objectively.

26
Q

Legal Action when Fraud is discovered:

A

-Pursue no legal action,

-Pursue civil remedies, and/or

-Pursue criminal action against the perpetrators.

27
Q

Civil Action

A

-Purpose is to recover money or other assets from the fraud perpetrators and others associated with the fraud

28
Q

Criminal Action

A

-Law enforcement or statutory agencies

-Fines, prison terms, or both

-Restitution agreements

29
Q

Prevention of Fraud Tips:
Create a culture of honesty, openness, and assistance

A

-Hire honest people and providing fraud awareness training

-Create a positive work environment, which means having a well-defined code of conduct, having an open-door policy, not operating on a crisis basis, and having a low-fraud atmosphere

30
Q

Prevention of Fraud Tips:

Hire honest people and providing fraud awareness training

A

-Verify all information on the applicant’s résumé:
* Require all applicants to certify that all information on their application and/or résumé is accurate
* Train those involved in the hiring process to conduct thorough and skillful interviews
* Use industry-specific or other approaches as deemed necessary (credit checks, fingerprinting, drug tests, public record searches, honesty tests, etc.)

31
Q

Prevention of Fraud Tips:

Creating a positive work environment..

A

-Creating expectations about honesty through having a good corporate code of conduct and conveying those expectations throughout the organization

-Having open-door or easy access policies

-Having positive personnel and operating procedures

32
Q

Five methods of eliminating fraud opportunities:

A

-Having good internal controls

-Discouraging collusion between employees and customers or vendors and clearly informing vendors and other outside contacts of the company’s policies against fraud

-Monitoring employees and providing a hotline (whistle-blowing system) for anonymous tips

-Creating an expectation of punishment

-Conducting proactive auditing

-Each method reduces either the actual or the perceived opportunity to commit fraud.

33
Q

Control Activities: Segregation of Duties

A

-Having two people do a task together or splitting the task into parts so that no one person handles the complete assignment

34
Q

Control Activities: Authorizations

A

Having a system of proper authorizations so that only authorized or designated individuals have permissions to complete certain tasks

35
Q

Control Activities: Physical Controls

A

Implementing physical safeguards such as locks, keys, safes, fences, and so on, to prohibit access to assets and records

36
Q

Control Activities: Independent Checks

A

Implementing a system of independent checks such as job rotations, mandatory vacations, audits, and so on

37
Q

Control Activities: Documentation

A

Having a system of documents and records that provide an audit trail that can be followed to check on suspicious activity and to document transactions

38
Q

True or False:

Collusion is where two or more people are working together to commit and cover up fraud

A

True

39
Q

Monitor employees and have a whistle-blowing system:

A

-Close monitoring

-A good whistle-blowing program is one of the most effective fraud prevention tools.

-Create an expectation of punishment

40
Q

Monitor employees and have a whistle-blowing system:

Close monitoring

A

-Facilitates early detection

-Deters frauds because potential perpetrators realize that “others are watching”

41
Q

Monitor employees and have a whistle-blowing system:

A good whistle-blowing program is one of the most effective fraud prevention tools.

A

-Approximately 33 percent of all frauds are detected through tips.

-Section 806 of the Sarbanes-Oxley Act of 2002 requires all public companies to have a whistle-blower system.

-Government agencies and some foreign companies have whistle-blower systems.

-Elements of an effective whistleblowing system

42
Q

Elements of an effective whistleblowing system:

A
  • Anonymity
  • Independence
  • Accessibility
  • Follow-up
43
Q

True or False: You must Develop a comprehensive approach to handle fraud incidents

A

True

Fraud Acct (2 decks)

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