ACC 451 Chapter 8
Terms in this set (33)
What are the fraud risk indicators that IA should be aware of?
Opportunity, pressure, rationalization
Provide examples of fraud risk indicators arranged under the vertices of the fraud triangle: rationalization,
-Complex transactions (near year end)
-Known history of securities law
-Ineffective communication and feedback about -internal controls
-Failure to address known material weakness controls in a timely manner
Provide examples of fraud risk indicators arranged under the vertices of the fraud triangle: pressure,
-High degree of competition/market saturation + declining margins
-High vulnerability to rapid changes
-Significant declines in customer demand and increasing business failures in either the industry or overall economy.
Provide examples of fraud risk indicators arranged under the vertices of the fraud triangle: opportunity,
-Formal/informal restrictions on the auditor's
-Significant related party transactions (not ordinary) or with related entities that are not audited/are audited by another firm
-Domination of management by a single person/small group
-Weakness in AIS controls (material or significant deficiencies)
-Inadequate monitoring of significant controls
-Ineffective board or audit committee oversight over the financial reporting process and system of -internal controls
-High turnover rates
-Unqualified accounting, internal audit, or IT staff
What are the 5 key principles for managing fraud risk outlined in the Fraud Guide?
1. Governance over the fraud risk management
2. Fraud risk assessment
3. Fraud risk prevention
4. Fraud risk detection
5. Fraud reporting, investigation & resolution
Related to an organization's fraud risk management, what are some examples of strong governance practices?
Identify the implications for internal auditors.
-Make commitment by the board and senior management
-Conduct fraud awareness activities (training)
-Implement Affirmation process that requires all to affirm periodically
-Declare awareness of rules & regs
-Require conflict disclosure protocol/process
-Board ownership of agendas and info flow
-Access to multiple layers of management and effective control of a whistleblower hotline
-Independent BOD member nomination processes
-Effective senior management team: evaluations, performance management, compensation, and succession planning
-Code of conduct for senior management in addition to organization's code of conduct
-Strong emphasis on the board's own independent effectiveness and process through board evals, executive sessions, and active participation in oversight of strategic risk mitigation efforts.
1. Consider fraud in everything they do
2. Apply healthy professional skepticism and professional judgment
3. In addition to establishing direct lines of reporting to the audit committee, develop practices to strengthen the independent status of the IA function
4. Review if the management rely upon internal auditors as competent and objective professionals in adressing fraud risk and control issues
What does "professional skepticism" mean?
State of mind: IA takes nothing for granted. The ability to critically evaluate the evidence and information available at hand.
What are the three key steps in a fraud risk assessment?
1. Identify inherent risk of fraud
a. Considering all types of fraud schemes and scenarios
b. Incentives, pressures, and opportunities to commit fraud
c. IT fraud risks specific to the organization
2. Assess impact and likelihood of the identified risks to the achievement of an organization's objectives
3. Develop proper response
What key points should be considered when assessing fraud risks?
- Incentives, pressures, and opportunities
- Risk management's override of controls
- Types of fraud risks:
a. Fraudulent financial reporting
b. Misappropriation of assets
Per Fraud Guide, what methods can an organization employ to prevent fraud?
First line of defense & Promoting an awareness of fraud risk management program
-Performing background investigations
-Providing anti-fraud training
-Evaluating performance and compensation programs
-Conducting exit interviews
-Establishing authority limits
-Scrutinizing selected transactions, such as those with related parties, before they are consummated
Per Fraud Guide, what methods can an organization employ to detect fraud?
-Proactive fraud detection procedures
Implication: we need to learn more about technology to use it detect fraud, and know when to hire an outside specialist.
Why must internal auditors be knowledgeable about the Foreign Corruption Practice Act of 1977 (FCPA)?
It provides warning signs of possible illegal activities
- Unauthorized transactions, improperly recorded transactions
- Large payments for unspecified services to consultants, affiliates, and employees
- Unexplained payments made to government officials or employees
- Excessive sales commissions/agents' fees
- Failure to file tax returns or to pay duties/fees
- Need to focus on potential compliance activities & keep integrity of accounting records
- Fulfill due diligence
- Initiate internal investigations when necessary and monitor results
- Examine related business, contractual, and employment issues
- Identify measures for staying clear of FCPA and pre-empting enforcement actions
What should internal auditors include in their fraud audit communications?
-Brief, clear statement of the issus [Condition]
-Citation of the relevant policies, rules, standards, laws, and regulations that may be applicable to the case at hand [Criteria]
-The analysis of the evidence gathered to form a professional opinion [Causes] [Consequences]
-The [Conclusions], the findings and recommendations
Do Not Include
Fraud Reporting, investigation, and resolution
-Advertise fraud reporting resources
-Establish a formal, structured, documented investigation process
-Complete a timely response
Implication: Make sure there is a direct communication line
Five C's of Audit Reports
Condition, Criteria, Cost, Consequences, Conclusion (recommendation)
Describe the focuses different fraud indicated by the definitions of fraud by AICPA, ACFE and IIA.
Financial reporting (ACIPA)
Employee theft (ACFE)
Many types including financial reporting and employee theft (IIA)
According to the AICPA, by what 3 ways can fraudulent financial statements be accomplished?
- Manipulate/ falsify/alter accounting records/supporting docs (input fraud)
- Misrepresenting, intentionally omitting, financial statement events, transactions, or other signification info
- Intentionally misapplying accounting principles relating to the amounts, classification, manner of presentation, or disclosure
From an organization's standpoint, because internal auditors are seen to be "internal control experts," they also are:
The best resource for audit committee, management , and others to consult in-house about the design and implementation of effective anti-fraud programs and controls.
Financial statement misstatements are most frequently caused by:
Unintentional misstatements (error).
How should an organization handle an anonymous accusation from an employee that a supervisor in the organization has manipulated time reports?
Assess the facts provided by the anonymous party against preestablished criteria to determine whether a formal investigation is warranted.
Internal auditors who hold the CIA, CPA/CA, and CFE designations must:
Treat errors differently from instances of fraud, as the latter have to do with intentional misstatements.
The internal auditors' responsibility regarding fraud includes all of the following except
a. Determining whether the control environment sets the appropriate tone at top.
b. Ensuring that fraud will not occur.
c. Being aware of activities in which fraud is likely to occur.
d. Evaluating the effectiveness of control activities.
b. Ensuring that fraud will not occur.
Which of the following is an example of misappropriation of assets?
A small amount of petty cash is stolen.
An organization that manufactures and sells computers is trying to boost sales between now and the end of the year.
It decides to offer its sales representatives a bonus based on the number of units they deliver to customers before the end of the year. The price of all computers is determined by the vice president of sales, and cannot be changed by sales representatives.
Which of the following presents the greatest reason a sales representative may commit fraud with this incentive program?
Customers have the right to return a laptop for up to 90 days after purchase
A payroll clerk increased the hourly pay rate of a friend and shared the resulting overpayment with the friend. Which of the following controls would have best served to prevent this fraud?
Limiting the ability to make changes in payroll system personnel information to authorized human resource department supervisors.
Prediction is a technical term that refer to
The ability of the fraud examiner to commence an investigation given the establishment of the predicate that fraud exists and may still be occurring
The internal audit functions responsibilities with respect to fraud are limited to:
Being aware of fraud indicators, including those relating to financial reporting fraud but not necessarily possessing the expertise of a fraud investigation specialist
What fraud schemes were reported to be most common in the ACFEs 2012 report to the nation?
Misappropriation of assets by employees
Which of the following is not a typical rationalization of a fraud perpetrator?
I'm smarter than the rest of them
Which of the following is not something all levels of employees should do?
Investigate suspicious activities that they believe maybe fraudulent
Which of the following is not an example of a fraud prevention program element?
Analyzing cash disbursements to determine whether any duplicate payments have been made
Which of the following types of companies would most likely need the strongest anti-fraud controls?
Internal audit function's responsibilities with respect to fraud are limited to:
Being aware of fraud indicators, including those related to financial reporting fraud, but not necessarily possessing the expertise of a fraud investigation specialist.
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