14 - Fraud and Error

Question 1

Intentional act involving use of deception that results in material misstatement of FS

Answer 1

Fraud

Question 2

2 Types of Misstatements

Answer 2

1. Arising from misappropriation of assets
2. Arising from fraudulent financial reporting

Question 3

Perpetrator steal or misuses organization’s assets; dominant fraud scheme.

Answer 3

Asset misappropriation

Question 4

Embezzling cash receipts, stealing assets, or causing the company to pay for goods that were not received

Answer 4

Asset misappropriation

Question 5

Intentional manipulation of reported financial results to misstate economic condition of the organization

Answer 5

Fraudulent financial reporting

Question 6

Characterizes opportunities that enable fraud to exist

Answer 6

The Fraud Triangle

Question 7

3 Elements of the Fraud Triangle:

Answer 7

1. Incentive
2. Opportunity
3. Rationalization

Question 8

Incentives relating to asset misappropriation

Answer 8

> personal factors
pressure from family to have a lavish life
addictions to gambling or drugs

Question 9

Incentives relating to fraudulent financial reporting

Answer 9

> debt covenants
personal wealth
greed

Question 10

Opportunities to commit fraud

Answer 10

> significant related-party transaction
weak internal controls
ineffective monitoring of management by the Board