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The document outlines a Fraud Risk Assessment process aimed at identifying potential fraud risks within a company, focusing on external pressures, internal vulnerabilities, and specific high-risk areas. It emphasizes the importance of understanding these factors to implement effective controls and prevent fraud, detailing consequences of fraudulent activities such as direct asset theft and financial misrepresentation. The document also highlights the implications of fraud on an organization's financial health and reputation, including the risks associated with overstating or understating profits.

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22 views4 pages

2

The document outlines a Fraud Risk Assessment process aimed at identifying potential fraud risks within a company, focusing on external pressures, internal vulnerabilities, and specific high-risk areas. It emphasizes the importance of understanding these factors to implement effective controls and prevent fraud, detailing consequences of fraudulent activities such as direct asset theft and financial misrepresentation. The document also highlights the implications of fraud on an organization's financial health and reputation, including the risks associated with overstating or understating profits.

Uploaded by

Bunthea
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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III | Fraud Risk Assessment

 A Fraud Risk Assessment is a structured, systematic process undertaken by a company to


proactively identify where and why fraudulent activities might occur within its operations. It
involves examining external pressures, internal vulnerabilities (related to people, systems,
and culture), and specific high-risk business activities.

 The primary goal is to understand these potential weaknesses thoroughly so that effective
controls and security measures can be designed and implemented to prevent or detect fraud.

3.1 | External Factors (Pressures from Outside)

 What it is: Conditions originating outside the company (economic, industry, regulatory,
societal) that can create pressure or justification for individuals inside to commit fraud.

 Why it matters: These factors often heighten the 'Motivation' element of the Fraud Triangle
for employees or the company itself.

 Typical indicators / Examples:

o Economic downturn: Increased pressure on employees/company to meet targets or


personal financial hardship.

o New tax laws: Creates incentives to hide income/assets fraudulently.

o Tougher regulations: Pressure to falsify compliance data to avoid penalties.

3.2 | Internal Factors (Weak Spots Inside)

 What it is: Conditions, characteristics, or changes within the company related to its people,
systems, or culture that can increase fraud likelihood.

 Why it matters: These factors can impact any element of the Fraud Triangle (Motivation,
Opportunity, Dishonesty/Rationalisation).

 Typical indicators / Sub-types:

o People: Low employee morale, perceived unfair treatment, inadequate


compensation, known personal financial difficulties among staff.

o Systems: Poorly designed operational processes, lack of adherence to procedures,


technological loopholes, inadequate monitoring or controls.

o General Mood (Culture): Weak "tone at the top," a culture where rule-bending is
common, unethical behaviour is tolerated or goes unpunished.

3.3 | Specific Risk Areas (Company Hotspots for Fraud)

 What it is: Particular functions, departments, or processes within the business that, due to
their nature, are inherently more susceptible to certain fraud schemes.

 Why it matters: These represent potential 'Opportunity' hotspots, especially if specific


controls related to these activities are weak or missing.

 Illustrative examples:

1. Cash handling: Areas involving physical cash (registers, petty cash, donations) due
to ease of theft.

FAU, FFM, FBT Kim Mara | 5


.
2. Purchasing & Payables: Processes for buying goods/services and paying bills (risk
of fake suppliers/invoices, kickbacks, false expense claims).

3. Payroll: Paying employees (risk of ghost employees, phantom overtime/unworked


hours).

4. Inventory or Assets: Managing physical goods or company property (risk of theft,


misuse for personal gain).

5. Revenue Recognition: Recording sales income (risk of fictitious sales, premature


revenue booking).

Q5: All of the following, with one exception, are internal factors which might increase
the risk profile of a business.

Which is the exception?

O Increased competition
O Corporate restructuring
O Upgraded management information system
O New personnel

Q6: Which of the following would most clearly present a personnel risk of fraud?

O Segregation of duties
O High staff morale
O Staff not taking their full holiday entitlements
O Consultative management style

Q7: Which of the following is NOT a key risk area for computer fraud?

O Hackers
O Lack of managerial understanding
O Inability to secure access to data
O Integration of data systems

FAU, FFM, FBT Kim Mara | 6


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IV | Implications of Fraud for the Organisation

 Fraudulent activities inflict substantial damage on an organisation, extending beyond the


initial breach of trust. The consequences typically fall into two main categories: direct theft
of assets, which immediately reduces available funds, lowers profits, and can threaten the
company's survival, and the misrepresentation of the company's financial picture.

 Falsifying financial performance, whether by overstating profits (leading to excessive


payouts, poor investments, and lost trust) or understating them (causing bad publicity,
reputational harm, and legal issues), deceives stakeholders and can have devastating long-
term effects.

4.1 | Direct Theft of Assets

 What it is: The direct removal or stealing of the company's tangible or monetary assets (e.g.,
cash, inventory, equipment) by employees or associates.

 Consequences:

o Reduces Available Funds: Less cash on hand to meet operational needs, pay bills,
or fund payroll.

o Lowers Profit: The value of stolen assets directly decreases reported profits.

o Risk of Collapse: Significant or sustained theft can deplete resources entirely,


potentially forcing the company out of business.

4.2 | Misrepresenting the Financial Picture

 What it is: Deliberately altering the company's accounting books and financial reports to
present an inaccurate view of its financial health or performance.

 General Consequence: Deceives internal and external stakeholders (management, investors,


lenders), leading them to make decisions based on false information.

4.2.1 | Overstating Profits (Making the Company Look Better)

o What it means: Manipulating records to show higher revenues or lower expenses


than reality.

o Common tricks: Recording fictitious sales, inflating inventory values, delaying the
recording of incurred costs.

o Impacts:

 Paying out too much: Distributing excessive dividends based on non-


existent profits, leading to cash shortages.

 Bad investments: Management making poor strategic or investment


decisions based on inflated performance metrics.

 Broken Trust: Severe loss of confidence from investors, banks, and the
market once the manipulation is discovered, potentially leading to
withdrawn investment, credit denial, and lawsuits.

FAU, FFM, FBT Kim Mara | 7


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4.2.2 | Understating Profits (Making the Company Look Worse / Hiding Something)

o What it means: Manipulating records to show lower revenues or higher expenses


than reality.

o Common tricks: Deliberately exaggerating expenses, improperly deferring earned


revenue to future periods.

o Impacts:

 Bad Publicity: Negative perception of company performance, potentially


deterring investors or causing stock price declines.

 Damaged Reputation: Undermines the company's image and perceived


stability among customers, suppliers, and partners.

 Legal Problems: Can lead to regulatory investigations, fines, lawsuits, and


criminal charges for misleading investors or evading taxes.

Q8: Which TWO of the following stakeholders will be most directly affected if a
business overstates its financial position?

□ Staff
□ Customers
□ Investors
□ Suppliers

Q9: All of the following, except one, are potential impacts on a business of removal of
significant funds or assets.

Which is the exception?

O Fall in returns to shareholders


O Reduction in profits
O Increase in working capital
O Reputational damage

FAU, FFM, FBT Kim Mara | 8


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