Chapter 8 - Fraud

What are the 5 Fraud Criteria?

1. A false statement, representation, or disclosure is made

2. The fact is a material fact and induces a person to act

3. The fact was made with the INTENT TO DECEIVE(most difficult to prove)

4. A justifiable reliance on the fraudulent fact in which a person takes action

5. An injury or loss suffered by the victim

Explain the Fraud Triangle.

1. Opportunity: the employee has the ability to commit or conceal fraud

2. Pressure: The employee is incentivized to alleviate personal or employment pressures

   1. Employee Pressures → Financial, lifestyle, emotional

   2. Financial Statement Pressures → Financial, Industry conditions, Management Characteristics

3. Rationalization: Employee feels as if the decision to commit fraud is ok or convince themselves its not actually fraud → attitude, justification, lack of personal integrity

What are the two forms of fraud?

1. misappropriation of assets

2. Fraudulent financial reporting

Define misappropriation of assets.

• theft of a companies assets

  • usually due to an absence of internal control systems, or failure to enforce the internal control system

Define fraudulent financial reporting.

intentional or reckless conduct, resulting in materially misleading financial statements

Define the two examples of cash theft concealment.

Lapping - concealing the theft of cash through delays in posting collections to accounts receivable - applying payments received to different customer balances

Kiting - Creating cash using the lag time between when a check is deposited and the time it clears the bank

What are and are not the responsibility of auditors to detect and report fraud?

Auditors should perform audit procedures to identify potential fraud and report it to company management, but they do not have to detect all material fraud or report it to the SEC.

What are the 4 types of computer fraud?

1. Input fraud

2. Processor fraud

3. computer instructions fraud

4. output/data fraud

Define Input Fraud.

Alteration or falsifying input of data in the AIS, where you are authorized to access/input the data AS PART OF YOUR RESPONSIBILITIES.

Define Processor Fraud.

UNAUTHORIZED SYSTEM USE like using work computers for non-work activities, or using access you accidentally are granted.

Define Computer Instructions fraud.

Modyfying software to do unintended things

Define Output Fraud.

Stealing, copying, or misusing AIS reports or displayed information