Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

6. Internal Controls and Reporting Cash

Fraud and the Fraud Triangle

Financial Accounting

6. Internal Controls and Reporting Cash

Fraud and the Fraud Triangle

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Multiple Choice

In the context of the Fraud Triangle, how can excessive risk-taking by management impact a company's financial reporting?

It guarantees higher profits and reduces the likelihood of fraud.

It has no impact on the risk of fraudulent financial reporting.

It may increase the incentive to commit fraud in order to achieve desired financial results.

It eliminates the need for internal controls.

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Verified step by step guidance

Understand the Fraud Triangle: The Fraud Triangle consists of three elements that contribute to fraudulent behavior—Incentive/Pressure, Opportunity, and Rationalization. Excessive risk-taking by management can increase the pressure to meet financial targets, which is a key component of the triangle.

Analyze the impact of excessive risk-taking: When management takes excessive risks, they may set aggressive financial goals or benchmarks that are difficult to achieve through normal operations. This creates an incentive for fraudulent financial reporting to meet those goals.

Consider the role of internal controls: Excessive risk-taking may lead management to overlook or bypass internal controls, increasing the opportunity for fraud. Weak internal controls make it easier for individuals to manipulate financial data without detection.

Evaluate rationalization: Management may justify fraudulent actions by rationalizing that achieving financial targets is necessary for the company's survival or growth. This completes the Fraud Triangle and increases the likelihood of fraudulent financial reporting.

Conclude the relationship: Excessive risk-taking by management does not guarantee higher profits or eliminate the need for internal controls. Instead, it increases the incentive to commit fraud to achieve desired financial results, aligning with the correct answer provided in the problem.