Fraud Triangle
This fraud-triangle element is reduced most directly by strong internal controls
What is opportunity
This component includes the company’s ethical tone and organizational structure.
Control Environment
Requiring passwords for system access is this type of control.
What is preventative control
This act was passed in response to Enron and WorldCom.
What is SOX?
Under accrual accounting, expenses are recorded when this occurs.
What is when the cost is used?
A manager who steals inventory because "the company underpays me anyway" is demonstrating this fraud triangle element
What is rationalization
This component requires identifying risks such as new technology, employee turnover, or changes in customer behavior.
What is risk assessment
Monthly bank reconciliations fall under this category.
What are detective controls?
SOX requires auditors to retain work papers for this many years.
What is seven years?
A company pays $24,000 for a two‑year insurance policy. How much insurance expense should be recorded after one month?
What is $1,000?
(24,000 ÷ 24 months)
A company with excellent preventative controls but weak monitoring is most vulnerable to this specific fraud‑triangle element.
What is rationalization
Which internal control component would be most directly weakened if a company’s accounting software stopped generating exception reports?
What is monitoring
A company uses security cameras but never reviews the footage. Which control type is present but ineffective?
What is a detective control?
Explain why SOX prohibits auditors from providing certain consulting services to audit clients.
to prevent conflicts of interest that compromise auditor independence
A company earns $9,600 of revenue evenly over a 12‑month contract but has only received $2,000 cash. What adjusting entry is required at month‑end?
What is debit Accounts Receivable and credit Service Revenue for $800?
(9,600 ÷ 12)
Explain why motivation cannot be eliminated by internal controls, even if a company invests heavily in security systems.
Motivation stems from personal pressures outside the company’s control
A company has strong control activities but still experiences errors because employees don’t understand the procedures. Which component failed?
What is information and communication
Explain why separation of duties is considered preventative even though it does not physically stop fraud.
prevents a single employee from having the ability to commit and conceal fraud
Which SOX requirement directly prevents a CEO from claiming ignorance about fraudulent financial reporting?
What is executive certification of financial statements?
A company used $14,500 of supplies during the month but mistakenly recorded only $10,000. What is the correcting adjusting entry?
What is debit Supplies Expense $4,500 and credit Supplies $4,500?
A company discovers fraud even though all three fraud‑triangle elements were addressed. Identify the most likely explanation.
What is collusion
A company’s internal audit team discovers that managers override controls to speed up month‑end reporting. Which two internal control components are simultaneously compromised?
What are control environment
What are control activities
A company has strong preventative controls but still experiences unauthorized transactions. Identify the most likely failure in the detective‑control system.
Lack of reconciliations
Performance Reviews
Independent audits
A company is exempt from the auditor‑attestation portion of Section 404(b). Identify the type of company and explain why.
a smaller public company, because SOX exempts them from the external auditor’s internal‑control opinion to reduce compliance costs?
A company borrowed $150,000 at 9% interest on October 1. No interest has been recorded. What adjusting entry is required on December 31?
What is debit Interest Expense $3,375 and credit Interest Payable $3,375?
(150,000 × 9% × 3/12)