Fraud & The Fraud Triangle
What is oocupational fraud?
The use of one's job for personal enrichment through misuse of employer resources
Internal controls safeguard assets and improve the accuracy of what?
Accounting information.
SOX applies to companies filing financial statements with which agency?
The SEC
Which component sets the ethical tone of the company?
Control environment.
Separating authorization, recording, and custody is called what?
Separation of duties
Name the three parts of the fraud triangle
Opportunity, Motivation, Rationalization
Managers act as stewards of what?
The company’s assets.
What board did SOX create to oversee auditing?
The PCAOB
Which component identifies internal and external risks?
Risk assessment
Locks and restricted access are examples of what?
Physical Controls
Why is opportunity considered the most controllable part of the fraud triangle?
Because internal controls can directly reduce opportunities for fraud.
Why do internal controls matter for lenders and owners?
Managers are entrusted with their resources and must protect them.
Why must executives personally certify financial statements?
To increase accountability and reduce fraudulent misstatement.
Why are reconciliations considered part of control activities?
They ensure management’s directives are carried out through verification.
Why is proper authorization important?
It prevents improper use of company resources.
A manager feels financial pressure and justifies stealing small amounts of cash. Which two fraud triangle components are present?
Motivation & Rationalization
A company has accurate records but frequently loses physical inventory. Which internal control objective is failing?
Safeguarding assets.
An audit partner has led the same company’s audit for 7 years. Which SOX rule is violated?
Auditor rotation (must rotate off after 5 years).
A company has strong policies but never checks if employees follow them. Which component of internal control is missing?
Monitoring.
A company notices inventory shortages and hires an independent auditor. Which type of control is this?
A detective control.
A company has strong ethical leadership but weak separation of duties. Which fraud triangle component is most likely still present, and why?
Opportunity, because weak controls allow fraud to occur even if ethics are strong.
If a company has perfect ethical employees but no internal controls, can fraud still occur? Explain.
Yes, because opportunity still exists, and controls are needed to prevent errors or override.
Why does SOX prohibit auditors from providing certain nonaudit services to their audit clients?
To prevent conflicts of interest that could compromise audit independence.
If information & communication is weak, how might this undermine the other four components of Internal control?
Poor information flow prevents risks from being identified, controls from being executed, and monitoring from being effective.
Why can collusion defeat even strong internal controls?
Because multiple employees working together can bypass controls designed for individual oversight.