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Internal Audit Chapter 8

Terms in this set (11)

Why and How Fraud Happens:
Behavioral and Integrity Risks

- Collusion, including with Third Parties

- Conflicts of Interest

- Unethical Conduct

- Insider Trading and Self‐Dealing

Operational/Financial Risks

- Pressure to meet Earnings Targets

- Poor Internal Controls

- Lax Data/Information Security Structure

- Compensation Tied to Earnings/Performance

- Economic Downturn Creates Pressure
What are common Fraud Indicators?
- Numbers do not add up

- Revenues outside core business

- Important documents missing

- Journal entries without support

- Aggressive accounting techniques

- Management obsessed with revenue and profits

- Domineering management, executives

- Control overrides

- Collusion is usually involved
Who are the responsible parties for the risk of fraud?
- Board and Management

- Internal and external auditors

- All employees
What are the three components of the Fraud Triangle?
- Rationalization

- Perceived Opportunity

- Perceived Need (Pressure)
What are the Root Causes of Fraud?
- Supply of motivated offenders

- Availability of suitable targets

- Absence of capable guardians

- Means, motivation and opportunity

- Excuses/Rationalization
What are the three types of Dark Triad Personalities?
- Narcissists

- Psychopaths

- Machiavellians
What are the five common personality traits of Dark Triad Personalities?
- Little or no conscience

- Low empathy

- Anti‐social personality disorder (DSM‐5, APA, 2013)

- Disagreeableness

- Can be charming, but manipulative and scheming
Principle #8 of the COSO Framework:
The organization considers the potential for fraud in Assessing risks to the achievement of objectives.
Fraudulent Financial Reporting:

(Financial Statement Fraud)
- Misrepresentation

- Omission of information

- Intentional misapplication of accounting principles

- Misclassifications
Corruption:

(Financial Statement Fraud)
- Extortion

- Bribes/Kickbacks

- Conflicts of interest

- Illegal gratuities
What is the role of Internal Auditors in relation to fraud?
- Raise fraud awareness, fraud deterrence

- Whistleblower procedures

- Standard 2130: Nature of Work: Control

- Promote ethics and values

- Performance management and accountability

- Communications about risk and controls

- Coordination responsibilities - internal auditors need help to detect and prevent fraud from occurring

- Shadowing forensic investigations
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