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Chapter 3

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33 views

Chapter 3

Uploaded by

Karen Cael
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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CHAPTER 3  Fraud Schemes

“Ethics, Fraud, and Internal Control” 1. Fraudulent Statements - misstating FS to make the
copy better than it is
BUSINESS ETHICS
Ethics - system of moral principles 2. Corruption - collusion with some people inside or
- needed when conflicts arise outside the entity
a. Bribery
 4 Areas of Business Ethics b. Illegal gratuities
1. Equity c. Conflicts of interest
2. Rights d. Economic extortion
3. Honesty
4. Exercise of Corporate Power 3. Asset Misappropriation - more common on the
employee level
 Computer Ethics a. Check tampering
- social impact of computer technology b. Scheming
c. Cash larceny
Main Computer Ethics Issues d. Payroll fraud
1. Privacy e. Expense reimbursement schemes
2. Security - passwords f. Non-cash misappropriation
3. Ownership of property - copyright
4. Equity in access INTERNAL CONTROL
5. Environment issues - example: using of paper - helps safeguarding the assets
6. Artificial Intelligence - automation - ensure accuracy and reliability
7. Unemployment and displacement - promote efficiency
8. Misuse of computer
 Modifying Assumptions to the Internal Control
FRAUD - false representation with the intend to Objectives
deceive a party 1. Management Responsibility
2. Reasonable Assurance
Requisites of Fraud 3. Methods of Data Processing
1. False representation
2. Material fact  Limitation of Honest Errors
3. Intent to deceive 1. Honest errors
4. Justifiable reliance upon the information 2. Circumvention via collusion
5. Misrepresentation caused loss or injury 3. Management override
4. Changing conditions
The Fraud Triangle - pressure and opportunity vs.
ethics  Weak Internal Controls
1. Situational pressure - personal or job related 1. Destruction of Asset
pressures 2. Theft of an asset
2. Opportunity 3. Corruption of info
3. Ethics - character of a person or degree of moral 4. Disruption of the IS
opposition to act dishonestly
SAS 78/COSO
 Employee vs Management Fraud - describes the relationship between the firm’s:
Employee Fraud Management Fraud * internal control structure
- non-management - involves using the FS * auditor’s assessment of risk
personnel misrepresentation * the planning of audit procedures
- misappropriation of
assets Five Internal Control Components
1. Control Environment - the foundation
- sets the tone for the org and influences the control
of management and employees

2. Risk Assessment - identify, analyze, and manage


risks relevant to financial reporting

3. Information and Communication - obtain sufficient


knowledge of the IS

4. Monitoring - process of assessing the quality of


internal control design and operation

5. Control Activities
A. IT Controls - relates specifically to the computer
environment
 General Control - entity wide computer
environment
 Application Control - specific systems
B. Physical Control - control over human activities
 Transaction Authorization - ensure
employees are carrying out only authorized
transactions
 Segregation of Duties
 Supervision - large number of employees
need compensating control to oversee
operations
 Accounting Records
 Access Controls - ensure only authorized
personnel hold assets
 Independent Verification

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