Chapter 2 - Why People Commit Fraud

Question 1

3 Sides of the Fraud Triangle

Answer 1

1. Perceived pressure
2. Perceived opportunity
3. Attitude/Rationalization

Question 2

Types of Pressures

Answer 2

1. Financial
2. Vice
3. Work-related
4. Other e.g. keeping up with the joneses, want to present that you’re successful

Question 3

What is perceived opportunity

Answer 3

Why I can do it without being caught

Question 4

what is attitude/rationalization?

Answer 4

Why people tell themselves that it’s OK to steal. if someone has low ethics or integrity they will need little to no rationalization of their actions

Question 5

what is the perceived pressure

Answer 5

why you feel that you have to do it. perceived because it’s real to the person, even if it’s not a factual pressure

Question 6

what is COSO Framework?

Answer 6

1. control environment
2. Risk assessment
3. control activities
4. information and communication
5. monitoring

Question 7

COSO - explain control environment

Answer 7

• tone at the top

- attitude of the company management and staff regarding controls

Question 8

COSO - explain Risk Assessment

Answer 8

• a systematic approach to managing risk
• considers the potential for fraud and how to prevent it
• also monitoring external factors that could render internal controls ineffective

Question 9

COSO - explain control activities

Answer 9

policies and procedures that ensure managements directives are carried out

Question 10

COSO - explain information and communication

Answer 10

-understanding managements info technology, accounting systems, communication systems and processes

Question 11

COSO - explain monitoring

Answer 11

• How does management monitor its controls to see if they are working
• Do they make changes when they realize something isn’t working?

Question 12

things that increase the likelihood of fraud…

Answer 12

-weak internal controls

Question 13

strong internal controls help because…

Answer 13

they help to prevent fraud. fraudsters are less likely to try because they know they’ll eventually get caught

Question 14

types of control activities or procedures for preventing fraud

Answer 14

• segregation of duties
• physical safeguard (locks)
• passwords and authorization
• independent checks
• good documents and record keeping to help you detect

Question 15

5 aspects of the control environment

Answer 15

1 .managements role and example

2. management communication
3. appropriate hiring
4. clear organizational structure
5. effective internal audit department

Question 16

what is management’s role in the control environment?

Answer 16

setting the tone at the top

Question 17

explain management communication in the control environment?

Answer 17

code of conduct, training, communication regarding acceptable behaviors

Question 18

explain appropriate employee hiring in the control environment

Answer 18

screen for honest and competent employees. hiring people who are appropriate for the job

Question 19

explain clear organizational structure’s role in the control environment?

Answer 19

everyone knows who is responsible for what. e.g. 5 people using the same till in one day–no way to track who money from it

Question 20

explain effective internal audit department’s role in the control environment?

Answer 20

perform independent checks

Question 21

for the 5 elements of the control environment, what parts of the fraud triangle do they relate to?

Answer 21

1. management’s role/tone at the top - rationalization
2. management communication - rationalization
3. appropriate hiring - rationalization
4. clear organization structure - opportunity
5. effective internal audit department - opportunity

Question 22

characteristics of a target that make it easier to commit fraud…

Answer 22

• asymmetric info or the inability to judge the quality of what you’re getting e.g. can’t tell if your car is fixed or not by looking at it
• failure to discipline fraudsters , which emboldens them to do it again
• person having lack of access to information. e.g. stockholders limited knowledge
• ignorance, apathy, incapacity. e.g. hospital patience, old people
• lack of an audit trail.

Question 23

what accounts are most susceptible to be utilized in a fraud and why?

Answer 23

income statement or expense accounts because they’re closed out to RE at the end of the month

Question 24

name 6 financial pressures

Answer 24

1. greed
2. living beyond means
3. inability to pay bills/personal debt
4. poor credit
5. personal financial losses
6. unexpected financial needs

Question 25

what is dual custody?

Answer 25

- requires 2 individuals to work together at the same task | e. g. having 2 people verify and sign off on a deposit

Question 26

ways to rationalize fraud

Answer 26

- the organization owes me - nobody will get hurt - I deserve more - it's for a good purpose

Question 27

of the 3 elements of the fraud triangle, what do most companies focus on? what are frequently overlooked?

Answer 27

focus on: opportunity | overlook: pressure and rationalization

Question 28

what are internal controls that prevent or detect fraud?

Answer 28

COSO

Question 29

what pressure is most commonly associated with fraud?

Answer 29

financial pressure

Question 30

what is the control environment

Answer 30

the work atmosphere that an organization establishes for its employees