Deck 5: Fraud in Financial Statements and Auditor Responsibilities

Question 1

The difference between errors in the financial statements as compared to fraud is:

A)An error is always an intentional act designed to deceive another party
B)Fraud is always an intentional act designed to deceive another party
C)An error always leads to a qualification of the auditors' opinion
D)Fraudulent financial reporting is always material in amount

Answer 1

B

Question 2

The purpose of the fraud triangle is to identify:

A)The causes of when the audit opinion should be qualified.
B)The causes of and reasons for fraud when there may be intentional misstatements or omissions of amounts or disclosures in the financial statements.
C)The causes of when there is a lack of independence in performing an audit.
D)The causes of illegal acts.

Answer 2

B

Question 3

An auditor concludes that a client has committed an illegal act that has not been properly accounted for or disclosed.The auditor is most likely to withdraw from the engagement when the:

A)Auditor is precluded from obtaining sufficient competent evidence about the illegal act
B)Illegal act has an effect on the financial statements that is both material and direct
C)Auditor cannot reasonably estimate the effect of the illegal act on the financial statements
D)Client refuses to take the remedial steps deemed necessary by the auditors

Answer 3

D

Question 4

All of the following tend to be rationalizations for fraud except:

A)We need to protect the shareholders and keep the stock price high
B)All companies use aggressive accounting techniques
C)The employee will be fired unless s/he goes along with the fraud
D)We are correcting a temporary problem that will not exist in the future

Question 5

Which of the following elements were NOT part of the fraud at Tyco?

A)Benefits given to certain members of the board of directors to secure their silence about the fraud
B)Corporate assets used by members of top management for personal purposes
C)Setting up special-purpose-entities to keep debt off Tyco's books
D)Related party transactions that were not adequately disclosed

Question 6

An example of fraudulent financial statements is:

A)Misrepresentation of events,transactions,and other significant events in the financial statements
B)Failure to provide adequate documentation to support financial statements assertions
C)Aggressive accounting for transactions,events,or other significant matters
D)Misappropriation of assets

Question 7

The first step for an auditor who concludes an illegal act exists is to:

A)Bring the matter to the attention of the audit committee
B)Bring the matter to the attention of the SEC
C)Assess the impact of the illegal act on the financial statements
D)Assess the impact of the illegal act on the auditor's opinion

Question 8

The auditor's responsibility with regard to illegal acts is greatest when:

A)The illegal acts have an indirect and material effect on financial statement amounts
B)The illegal acts have a direct and material effect on financial statement amounts
C)The illegal acts have a direct and immaterial effect on financial statement amounts
D)Illegal acts exist regardless of the effects on the financial statements

Question 9

Misstatements in the financial statements can result from:

A)Errors
B)Fraud
C)Illegal acts improperly recorded
D)All of the above

Question 10

All of the following are in a position to commit fraud except:

A)Employees who have access to assets
B)Top management who can override internal controls
C)External auditors who audit the financial statements
D)All of the above are in a position to commit fraud

Question 11

Misstatements in the financial statements are most likely to occur when there are:

A)Omission of the auditor's report
B)Omission of notes to the financial statements
C)Failure to disclose major estimates made in the financial statements
D)Failure to disclose major judgments made in the financial statements

Question 12

Auditors are responsible to detect and correct errors when they are:

A)Material
B)Material or immaterial
C)Due to an illegal act
D)Management fails to correct for the error

Question 13

Which of the following is NOT something external auditors are expected to do in looking for fraud?

A)Assessing the control environment of the organization
B)Evaluating internal controls
C)Considering audit risk and materiality
D)Evaluating management's commitment to serve the public interest

Question 14

Which of the following is not part of the fraud triangle?

A)Incentives
B)Opportunity
C)Materiality
D)Rationalization

Question 15

Which of the following is NOT a pressure that might lead to fraud?

A)Desire to maximize the value of stock options
B)Budget pressures
C)Meet financial analysts' earnings expectations
D)Ability to carry out the fraud

Question 16

If the financial statements are not materially misstated,the auditor should give a(an):

A)Unmodified opinion
B)Modified opinion
C)Adverse opinion
D)Qualified opinion

Question 17

Confidential client information can be disclosed outside the entity without violating the AICPA Code of Professional Conduct in each of the following situations except when:

A)It is reported to the SEC under Section 10A of the Securities Exchange Act
B)It is to comply with the Private Securities Litigation Reform Act
C)It protects the auditor's accounting for fraud and illegal acts
D)It is allowed for under the Dodd-Frank Financial Reform Act

Question 18

The Private Securities Litigation Reform Act imposes additional requirements on public companies reporting to the SEC and their auditors when:

A)The illegal act has a material effect on the financial statements
B)Senior management and the board have not acted properly to correct for the act
C)The failure to correct for the action is reasonably expected to warrant a departure from the standard audit report
D)All of the above are additional requirements

Question 19

The best explanation why the fraud at Tyco was not discovered and acted on is:

A)Failure of the corporate governance system
B)External auditors told management to let the fraud go
C)Tyco management hid the fraud from the auditors
D)The fraud was not material

Question 20

The Committee of Sponsoring Organizations of the Treadway Committee (COSO) analyzed the financial reporting of public companies during the 1998-2007 periods when business failures due to accounting fraud were high and found that:

A)Top management was frequently involved in the fraud with the CEO and/or CFO being the most frequently involved
B)The most common fraud technique involved understating expenses
C)The audit committee always sanctioned the fraud
D)A minority of audit reports issued during the fraud period contained unqualified audit opinions

Question 21

Which of the following is NOT an element of the auditor's responsibility of the AICPA's auditor's report?

A)States the auditor's responsibility to express an opinion on the financial statements
B)States the audit provides reasonable assurance that the statements are free of material misstatement
C)States audit provides reasonable basis for the opinion
D)States the audit evaluates the overall financial statement presentation

Question 22

Under which of the following set of circumstances might the auditors disclaim an opinion?

A)The financial statements contain a departure from generally accepted accounting principles,the effect of which is material
B)The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion
C)There has been a material change between periods in the method of the application of accounting principles
D)Differences with management that lead to trust issues on the part of the auditor

Question 23

Typically,when a going concern issue exists the auditor should:

A)Issue an unmodified opinion with an emphasis-of-matter paragraph
B)Issue a modified opinion and explain the reasons for the going concern issue
C)Issue a disclaimer of opinion
D)Withdraw from the engagement

Question 24

Which of the following is NOT one of the communications that should be made by external auditors to the audit committee?

A)Accounting estimates
B)Threats to auditor independence and related safeguards to mitigate those threats
C)Significant deficiencies in audit procedures
D)The nature and scope of significant assumptions

Question 25

Which of the following is not true of "reasonable assurance"?

A)The auditors have exercised due care
B)The audit opinion is a guarantee that material misstatements have been identified
C)The audit has been properly planned and supervised
D)The auditors have followed GAAS

Question 26

The auditors' responsibility to communicate findings with respect to fraud can best be summarized as:

A)Communicate to the audit committee the existence of fraud but not the amount involved
B)Communicate to the audit committee both material and immaterial amounts of fraud that are detected
C)Communicate to the SEC the existence of fraud but not the amount involved
D)Communicate to the SEC both material and immaterial amounts of fraud that are detected

Question 27

What is enterprise risk management (ERM)?

A)A process of evaluating internal controls to ensure operations are carried out efficiently and effectively
B)A process designed to identify material events that may affect the financial statements and to manage risk within the entity's risk appetite
C)A process,effected by an entity's board of directors,management,and other personnel designed to identify potential events that may affect the entity and to manage risk within its risk appetite
D)A process by which compliance with laws and regulations can be assessed

Question 28

Which of the following is an element of the introductory paragraph of an auditor's report under AICPA standards?

A)Identifies the type of opinion the auditor is giving
B)Identifies the entity,financial statements being audited and time period
C)Identifies audit testing and procedures used
D)Identifies the generally accepted auditing standards followed in conducting the audit

Question 29

Which of the following is not an element of COSO Enterprise Risk Management?

A)Enhancing risk response decisions
B)Reducing operating surprises and losses
C)Seizing opportunities
D)Improving deployment of information technology

Question 30

Which of the following is the most likely reason for an auditor to issue an adverse opinion?

A)Inability to gather any sufficient relevant information to form the basis for the opinion
B)Misstatements that are material and pervasive
C)Going concern issue
D)Misstatements that are material but not pervasive

Question 31

In which of the following circumstances would a qualified opinion be appropriate?

A)The statements are not in conformity with generally accepted accounting principles regarding stock options plans and but does not have pervasive effect on the financial statements
B)The statements are not in conformity with generally accepted accounting principles regarding stock options plans and has pervasive effect on the financial statements
C)The auditor has been unable to obtain sufficient competent evidential matter
D)The principal auditors decide to withdraw from the engagement due to distrust of management

Question 32

The title of the PCAOB auditor's report is:

A)Independent Auditor's Report
B)Report of the Independent Registered Audit Firm
C)Auditor's Report on Management's Financial Statements
D)Auditor's Report on Internal Controls

Question 33

Which of the following is not one of the evaluations of the control environment of an organization?

A)Whether management's philosophy and operating style promote effective internal control over financial reporting
B)Whether sound integrity and ethical values,particularly of top management,are developed and understood
C)Whether the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control
D)Whether the company has an anonymous hot line

Question 34

One difference between the AICPA auditor's report and that of the PCAOB is:

A)The PCAOB report is not signed by the auditor
B)The AICPA report is not signed by the auditor
C)The PCAOB report does not have section headings
D)Both reports are the same

Question 35

Some critics claim the usefulness of the audit report is limited because:

A)Auditors do not examine management's estimates and judgments
B)Language in the audit report relies on subjective evaluations such as what is meant by "reasonable"
C)Transactions examined are based on sampling and other techniques to limit choices of which transactions to audit
D)All of the above may create doubts about usefulness

Question 36

Section 302 of the Sarbanes-Oxley Act requires:

A)Management's report on internal controls
B)Auditor's independent report
C)Auditor's assessment of management's report on internal controls
D)Management's certification of the financial statements

Question 37

The framework of COSO's Enterprise Risk Management can best be characterized as:

A)Incorporate enhanced internal control principles into enhanced corporate governance
B)Incorporate enhanced audit sampling procedures in the testing of internal controls
C)Incorporate enhanced corporate governance into internal control principles
D)Incorporate enhanced audit sampling procedures in substantive testing

Question 38

Which of the following is an element of ERM?

A)Reducing operational surprises and losses
B)Aligning risk appetite and whether fraud has occurred
C)Control environment
D)Audit risk assessment

Question 39

When would it be appropriate for an auditor to withdraw from an engagement?

A)In order to avoid issuing an adverse opinion
B)When that auditor cannot observe the taking of inventory or is unable to confirm receivables
C)When the auditor concludes that management cannot be trusted
D)When the auditor has overbooked too much work

Question 40

Which of the following is the most likely reason for an auditor to issue a modified opinion with a qualification?

A)Inability to gather any sufficient relevant information to form the basis for the opinion
B)Misstatements that are material and pervasive
C)Going concern issue
D)Misstatements that are material but not pervasive

Question 41

Which of the following is not one of the reporting standards of GAAS that guides auditors in formulating the audit opinion?

A)The financial statements have followed GAAP
B)Consistency in the application of GAAP
C)Adequate disclosures exist in the statements
D)Gathering sufficient audit evidence to warrant an opinion

Question 42

Which of the following audit deficiencies was identified most often in a study by the Center for Audit Quality of SEC imposed sanctions?

A)Failure to gather sufficient competent evidence
B)Failure to exercise due care
C)Insufficient level of professional skepticism
D)Failure to obtain adequate evidence related to management representations

Question 43

Which of the following is not a consideration in determining a measure of materiality?

A)Risks of material misstatements due to fraud
B)Quantitative assessment of the importance of the difference of opinion with client management on an accounting issues
C)Qualitative assessment of the importance of the difference of opinion with client management on an accounting issues
D)Importance of audit committee in the organization

Question 44

PCAOB Auditing Standard No.16 requires the auditor to communicate with the audit committee all but:

A)Significant accounting policies and practices
B)Critical accounting practices and policies
C)Significant unusual transactions
D)The procedures followed by the auditor in evaluating evidence

Question 45

The auditors' determination of whether the financial statements "present fairly" is based on:

A)Whether the users are able to assess the reliability of the financial statements
B)Whether the statements have been prepared in accordance with the same GAAP used from one year to another
C)Whether the auditor has been able to gather sufficient evidence to warrant the statement that the financial statements present fairly
D)Whether the accounting principles used are appropriate in the circumstances

Question 46

Which of the following summarizes the essence of general standards of GAAS?

A)Quality of professionals that perform an audit
B)Criteria used to judge whether the audit has met quality requirements
C)The standards that guide auditors in issuing the audit report
D)Whether the auditor obtained sufficient competent evidential matter to render an opinion

Question 47

In an audit,the auditor has a requirement to address risk assessment with respect to:

A)The design and performance of audit procedures to respond to assessed risks
B)Whether the standards close the expectation gap
C)The role and responsibilities of the audit committee in preventing fraud
D)All of the above

Question 48

Which of the following is not correct about materiality?

A)The concept of materiality recognizes that some matters are more important for fair presentation of financial statements
B)Materiality judgments are made in light of surrounding circumstances and necessarily involve quantitative and qualitative judgments
C)Materiality should be predictable from audit to audit so that the readers of financial statements know what constitutes materiality
D)An auditor's consideration of materiality is influenced by the auditor's perception of the need of the readers of the financial statements

Question 49

In gathering audit evidence,the accessibility of information may be a factor thereby influencing which judgment trigger?

A)Confirmation
B)Overconfidence
C)Anchoring
D)Availability

Question 50

The SEC is concerned that auditors don't pay enough attention to qualitative factors affecting materiality because:

A)Qualitative factors may cause quantitatively small misstatements to become material
B)Quantitative factors are not always useful
C)Quantitative factors cannot be accumulated to assess overall materiality
D)All are of concern to the SEC

Question 51

Audit documentation is critical to evidence gathering because:

A)It demonstrates that an audit has been conducted
B)It demonstrates professional skepticism
C)It substitutes for making audit judgments and estimates
D)All of the above

Question 52

The main reason the PCAOB has charged Chinese affiliates of U.S.audit firms with failing to provide sufficient documentary evidence of audits of Chinese companies listed on U.S.exchanges is:

A)Audit firms are unable to gather sufficient competent evidential matter
B)Audit firms are not knowledgeable enough about Chinese accounting standards
C)Chinese regulatory agencies can be uncooperative in providing access to PCAOB regarding their inspections of audit documents
D)Chinese regulatory agencies conduct inspections of the audit documents of the firms

Question 53

Because of the risk of material misstatement due to improper management representations,an audit of financial statements in accordance with GAAS should be performed with:

A)Objective judgment
B)Professional skepticism
C)Internal controls
D)Due diligence

Question 54

PCAOB Standard 14 addresses audit results and requires:

A)Auditor's evaluation of internal controls
B)Auditor's determination of whether the auditor has obtained sufficient appropriate evidence
C)Auditor's evaluation of the applicable financial reporting framework
D)Auditor's independence

Question 55

Gathering and objectively evaluating audit evidence requires the auditor to consider:

A)Whether an unmodified opinion should be issued
B)Whether a modified opinion should be issued
C)Whether the evidence is adequate to complete the audit
D)Whether the evidence is competent and sufficient enough to render an audit opinion

Question 56

Which of the following is NOT one of the most common audit deficiencies identified in PCAOB inspections?

A)Inadequate internal controls over financial reporting
B)Lack of independent audits
C)Lack of due care
D)Inability to exercise the appropriate level of professional skepticism

Question 57

Which of the following summarizes the essence of field work standards of GAAS?

A)Quality of professionals that perform an audit
B)Criteria for judging the quality of audit work
C)Whether the auditor was independent in conducting the audit
D)Whether the auditor reviewed the client's financial statements for adherence to GAAP

Question 58

Audit procedures are different than audit evidence because:

A)Audit procedures address the competency and sufficiency of audit evidence
B)Audit procedures are specific acts performed by the auditor to gather evidence about whether specific assertions are being met
C)Audit procedures are specific acts to assess whether the financial statements "present fairly"
D)Audit procedures do not have to be determined based on risk assessment

Question 59

PCAOB Standard 7 addresses engagement quality reviews and have as its objectives to:

A)Assess how an audit has been conducted and the appropriateness of the audit opinion
B)Assess the firm's own quality controls and the appropriateness of the audit opinion
C)Assess how an audit has been conducted and the firm's own quality control procedures
D)Assess whether materiality has been properly evaluated

Question 60

PCAOB Auditing Standard No.16 requires the auditor to communicate with the audit committee all but:

A)Going concern issues
B)Whether the auditor expects to modify the opinion
C)Any disagreements with management
D)The procedures followed to comply with generally accepted auditing standards

Question 61

What is the purpose of having required auditor communications between the external auditor and the audit committee?

Question 62

The case which deals with assigning a quality review partner to an audit is:

A)ZZZZ Best
B)Imperial Valley Community Bank
C)Busy Season Planning
D)Rooster,Hen,Footer and Burger

Question 63

Campus Fast is a new audit client.Client Fast uses public WiFi to place and deliver restaurant take out for students at the Up and Coming State University.Campus Fast was founded by three highly ambitious MBA students at the university.The business plan is to find a buyer or place an IPO of the company by graduation in two years.The founders expect to pay off all student loans,take a tour around the world and then start another company.In order for the business plan to work on the timeline for graduation,the business must meet highly ambitious earnings numbers.Additionally,the company is dealing with two situations that the founders would like to keep from the auditors:
1) The company has been using free,unsecured public WiFi to take orders via the Internet.The customer may pay via the Internet.Several students,who all happen to be members of the same student organization on campus,are claiming that using Campus Fast has allowed their identity to be stolen.One student is claiming that she had $12,000 of charges on her credit card to the unsecured Internet site of Campus Fast.Management plans to pay off the complaining students and keep the true liability off the balance sheet.The reason is Campus Fast is concerned that an interested buyer may become concerned about the unsecured site and might get scared by the student complaints.
2) The company guarantees fast delivery.It has offered to pay any speeding or other moving violation tickets to its delivery drivers.Unfortunately,one of the drivers was involved in an accident due to running a red light.The passenger in the other car is in critical condition and the intensive care unit in the hospital.The driver has promised the family of the passenger that the company will make good on any expenses and admitted the company policy on repaying all traffic tickets.Attorneys for the injured party are threatening to sue and publicize the situation.The founders do not have enough cash to take care of this problem but are still trying to keep the situation from the auditors and potential buyer.
Using the internal control framework assess the internal controls at Campus Fast and risk environment.

Question 64

The Tax Inversion case deals with:

A)Whether IFRS should be used for all subsidiaries following an acquisition
B)Whether IFRS should replace U.S.GAAP
C)Whether a quality reviewer should be chosen from outside the company
D)Whether a tax inversion should occur

Question 65

On July 1,2015,the Public Company Accounting Oversight Board issued a concept release to seek public comment on the content and possible uses of a group of potential "audit quality indicators." The indicators are a potential portfolio of quantitative measures that may provide new insights about how to evaluate the quality of audits and how high quality audits are achieved.Taken together with qualitative context,the indicators may inform discussions among those concerned with the financial reporting and auditing process,for example among audit committees and audit firms.Enhanced discussions,in turn,may strengthen audit planning,execution,and communication.The Board sought advice on these subjects through the comment process and were to convene a public roundtable about the concept release,on a date to be determined during the fourth quarter of 2015.The proposed indicators are in the exhibit below.
Required:
Comment on the need for audit quality indicators and any limitations of providing such information in the public domain.
The 28 potential indicators are:

Question 66

Why is materiality one of the most difficult judgments to make in auditing financial statements?

Question 67

In the Imperial Valley Community Bank case,each of the following were reasons for the going concern issue except:

A)The magnitude of loan losses
B)Insufficient equity capital
C)Operating losses over an extended period of time
D)Questions about the collectability of outstanding loans

Question 68

Which of the following is NOT addressed in the Diamond Foods case?

A)Accounting for payments to walnut growers
B)Matching revenues with the proper period
C)Depreciation of almond trees
D)Misleading the external auditors

Question 69

In the ZZZZ best case,Barry Minkow was charged with:

A)A fraudulent insurance restoration scam
B)Insider trading on Lennar stock
C)Stealing from a San Diego church
D)Overcharging a LA housewife for carpet cleaning services

Question 70

The primary issue in the Rooster,Hen,Footer and Burger case is:

A)The timing of revenue recognition and shipping date of merchandise
B)Related party transactions
C)The timing of expense recognition on accrual accounts
D)The accounting for walnuts

Question 71

Bill Young's ethical dilemma was:

A)Whether the loan loss reserves of the bank were understated
B)Whether to file a whistle-blower's complaint with the SEC under Dodd-Frank
C)Whether to commit fraud to cover up stealing from the company
D)Whether to inform management or the regulatory authorities of illegal acts of an audit client

Question 72

Internal controls,an internal audit function,and an audit committee are all elements of a strong corporate governance system.How should an external auditor evaluate these elements in making a risk assessment? What are the ethical signs that each system is operating as intended?

Question 73

In the Loyalty and Fraud Reporting case,Ethan Lester pressured his friend Vic Jensen to:

A)Misappropriate funds from the company
B)Cover up Ethan's fraud
C)Be silent and not report Ethan's fraud to the audit committee
D)Give an unmodified audit report

Question 74

The primary accounting issue in the Royal Ahold case is:

A)Fraudulent recording of revenues on sales to customers
B)Fraudulent use of company resources by top management for personal purposes
C)Fraudulent inflation of promotional allowances to increase operating income
D)Fraudulent inflation of inventory to reduce losses on the income statement

Question 75

Explain the circumstances under which an auditor should give each of the following opinions:
(a) Unmodified opinion
(b) Unmodified opinion with an emphasis-of-matter paragraph
(c) Qualified opinion
(d) Adverse opinion

Question 76

Explain the link between the opportunity to commit fraud and corporate governance systems.

Question 77

Differentiate between the auditors' responsibilities to detect errors,fraud,and illegal acts.How would you assess the ethics of a company that has experienced each event with respect to motivation and the integrity of those who go along with such events?

Question 78

The Groupon case deals with all but the following issues:

A)Improperly estimated customer returns
B)Improper recognition of gross revenue
C)Used a new innovative metric of "Adjusted Consolidated Segment Operating Income"
D)Blamed material weakness on their auditors EY

Question 79

Identify the deficiencies in the following audit report of the AICPA.Explain why each item is a deficiency.
Report of the Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders,XYZ Company
We have audited the accompanying consolidated financial statements of XYZ Company and its subsidiaries,which comprise the consolidated balance sheets as of December 31,2015 and 2014,and the related consolidated statements of income,changes in stockholders' equity,and cash flows for the years then ended,and the related notes to the financial statements.These statements are the responsibility of the Company's management.Our responsibility is to express an opinion on these financial statements based on our audits.
Management's Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design,implementation,and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement,whether due to fraud or error.
Auditor's Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits.We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board.Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements.The procedures selected depend on the management's judgment,including the assessment of the risks of material misstatement of the consolidated financial statements,whether due to fraud or error.In making those risk assessments,the auditor considers internal controls relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances.Accordingly,we express no such opinion.An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by during the audit,as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion,the consolidated financial statements referred to above present fairly,in all material respects,the financial position of XYZ Company and its subsidiaries as of December 31,2013,and 2012,and the results of its operations and its cash flows for the years then ended in accordance with auditing standards of the Public Company Accounting Oversight Board.
Optional Paragraph
Report on Other Legal and Regulatory Requirements
[Auditor's signature]
[Auditor's city and state]

Question 80

Explain each of the three sides of the fraud triangle with respect to how it contributes toward the possibility that fraud in the financial statements may be present.Are there differences with respect to how each element might influence occupational fraud and fraudulent financial statements? Explain.
One of the older and more basic concepts in fraud deterrence and detection is the "fraud triangle." While researching his doctoral thesis in the 1950s,famed criminologist Donald R.Cressey came up with this hypothesis to explain why people commit fraud.
The three key elements in the fraud triangle are opportunity,motivation,and rationalization.Opportunity is the element over which business owners have the most control.Limiting opportunities for fraud is one way a company can reduce it.
The opportunity to commit fraud is possible when employees have access to assets and information that allows them to both commit and conceal fraud typically because of weak internal controls including a lack of segregation of duties or oversight.Top management typically overrides the controls when committing financial statements fraud while employees may use the weaknesses to their advantage in perpetrating fraud.
Motivation is a pressure or a "need" felt by the person who commits fraud.It might be a personal financial or other type of need,such as high medical bills or debts,or as a result of bad personal habits as occurred in ZZZZ Best and Tyco where CEOs misappropriated company resources for personal gain.
Motivators can also be financial oriented that affects business results.Pressures may exist to meet or exceed financial analysts' earnings estimates or to qualify for high bonuses and/or to inflate share prices and make stock options more valuable.
Lastly,employees may rationalize this behavior by determining that committing fraud is OK for a variety of reasons.For those who are generally dishonest,it's probably easier to rationalize a fraud.For those with higher moral standards,it's probably not so easy.They have to convince themselves that fraud is OK with "excuses" for their behavior.
Common rationalizations include making up for being underpaid or replacing a bonus that was deserved but not received.A thief may convince himself that he is just "borrowing" money from the company and will pay it back one day.Some embezzlers tell themselves that the company doesn't need the money or won't miss the assets.Others believe that the company "deserves" to have money stolen because of bad acts against employees.
Business owners and executives must take control of fraud by working on the portion of the fraud triangle over which they have the most control: the opportunity to commit fraud.It may be difficult for management to do anything about an employee's needs or rationalizations,but by limiting opportunities for fraud,the company can reduce it to some extent.
This question provides an opportunity to review the GVV reasons and rationalizations framework.
As you read the case,think about the following series of questions for the protagonist to address after identifying the right thing to do including:
•How can they get it done effectively and efficiently?
•What do they need to say,to whom,and in what sequence?
•What will the objections or push-back be and,then,
•What would they say next? What data and examples do they need?