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CMA Part 2 > Fraud > Flashcards

Flashcards in Fraud Deck (13)
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1

What are the three characteristics of fraud?

Opportunity, rationalization and pressure (motive).

2

What is fraudulent financial reporting?

It's a type of fraud that most often committed by management to deceive financial statements users. It is the focus of external auditors and the concern of regulatory bodies, such as the SEC and the Public Company Accounting Oversight Board.

3

What is misappropriation of assets?

It's a type of fraud that is most often committed by employees and results from theft, embezzlement and defalcation. It is an internal problem, although financial statements are misstated. Once discovered, the effects should be accounted for on the financial statements. Management is expected to have control in place to mitigate this fraud and deal with it effectively when it's discovered.

4

What is opportunity (in terms of fraud characteristics)?

It's a person's ability to perpetrate and conceal a fraud. It's likely to happen when there's no management oversight or internal control in place. It is also the ONLY fraud characteristic that can be controlled.

5

What is rationalization?

It's a person's ability to justify actions as consistent with his personal code of ethics. Ethical principles can vary greatly among individuals; thus, management accountants should assume that anyone can justify the commission of fraud. This characteristic is likely the MOST DIFFICULT to appraise.

6

What is Pressure (Motivation)?

It's a person's need to commit fraud. Pressure for misappropriation of assets is usually motivated by need of cash. Pressure for fraudulent financial reporting is typically motived by rewards (compensation, continued employment, respect, admiration, etc). Pressure for fraudulent financial reporting can be also motived by need to meet debt covenants, financial goals and earnings forecasts.

7

List the resources and techniques for fraud investigation.

Document, public search of information, electronic evidence, commercial online services and interviews.

8

What is the interview technique of fraud investigation?

It is the most efficient and useful evidence collection technique. An experienced interviewer can gather information that may be not available in any other form. Interviews should: be sufficient length and depth to uncover relevant facts, exclude irrelevant facts, be objective and impartial, be conducted on a timely basis, and allow information to flow from subject to interviewer.
It's difficult to determine if a person is lying or not, but some physiological behaviors are exhibited frequently by those who are not telling the truth. Care must be taken when drawing conclusion because stress of the interview or cultural differences can produce false positives.

9

List the four primary controls for fraud and their function.

1. Preventive controls: to deter the occurrence of an unwanted event.
2. Detective controls: to alert the proper individuals after an unwanted event; effective when detection occurs before material harm occurs
3. Corrective controls: to correct the negative effects of an unwanted event
4. Directive controls: encourage or cause the occurrence of a desirable event

10

List the two secondary controls for fraud management.

1. Compensatory controls: may reduce risks when primary controls are ineffective; however, they do not reduce risk to an acceptable level by themselves
2. Complementary control: work with other controls to reduce risk to an acceptable level

11

What is segregation of duties?

It enhances system security by separating the functions of authorization, record keeping and asset custody so the risk of one person to perpetrate and conceal (opportunity) is minimized.

12

What is independent checks and verification?

Reconciliation between recorded amounts and assets must be performed by a part of the organization that is either a) unconnected with the original transaction or b) without custody of the assets involved. The frequency depends on the nature and the amount of the assets. In addition, the costs should not outweigh the benefits.

13

What are safeguarding controls?

To limit the access (the physical asset and to the records + documentations) of an organization's asset to authorized personnel.