Fraud and the Fraud Triangle quiz #1 Flashcards
Fraud and the Fraud Triangle quiz #1
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What is fraud in the context of financial accounting?
Fraud is any dishonest act by an employee for personal benefit at the expense of the employer, such as stealing money, inventory, or creating fake invoices. What are the three elements of the fraud triangle?
The three elements of the fraud triangle are opportunity, incentive, and rationalization. Which element of the fraud triangle is most controllable by a company?
Opportunity is the most controllable element of the fraud triangle for a company. How can companies reduce the opportunity for fraud?
Companies can reduce the opportunity for fraud by implementing internal controls, such as daily cash register counts and safeguarding assets. What is meant by 'incentive' in the fraud triangle?
Incentive refers to the motivation or pressure that drives an employee to commit fraud, such as financial difficulties or desire for a lavish lifestyle. How does rationalization contribute to fraud?
Rationalization occurs when an employee justifies their dishonest actions, convincing themselves that committing fraud is acceptable. Give an example of rationalization in the context of fraud.
An employee might rationalize fraud by thinking, 'My employer doesn't pay me enough, so it's okay if I steal a little.' What are internal controls?
Internal controls are systems and procedures within a company designed to safeguard assets, ensure reliable financial information, and comply with laws. Why are internal controls important in preventing fraud?
Internal controls are important because they limit opportunities for employees to commit fraud and help detect dishonest acts. List two common forms of fraud in a company.
Two common forms of fraud are stealing cash from the register and creating fake invoices. How does financial pressure serve as an incentive for fraud?
Financial pressure, such as being behind on bills, can motivate employees to commit fraud to obtain extra money. What role does company policy play in minimizing fraud?
Company policy, through internal controls, sets procedures that reduce opportunities for fraud and ensure compliance with laws. How might an employee rationalize stealing inventory?
An employee might rationalize stealing inventory by believing they are underpaid or that the company owes them. What is the primary focus of internal controls?
The primary focus of internal controls is to safeguard company assets and ensure the reliability of financial information. Can a company completely eliminate the risk of fraud?
No, a company cannot completely eliminate the risk of fraud, but it can minimize it through effective internal controls. Why is opportunity considered the most important element of the fraud triangle?
Opportunity is considered most important because it is the element that companies can most directly control to prevent fraud. What is an example of an internal control to prevent fraud?
An example is requiring daily cash register counts to detect discrepancies quickly. How does ensuring compliance with laws relate to internal controls?
Internal controls help ensure that the company follows legal requirements, reducing the risk of unlawful activities. What might motivate an employee to create fake invoices?
An employee might create fake invoices due to financial need or desire for personal gain. How can management detect fraud early?
Management can detect fraud early by regularly reviewing financial records and enforcing internal controls. What is the relationship between internal controls and reliable financial information?
Internal controls help ensure that financial information is accurate and trustworthy by preventing and detecting errors or fraud. Why might an employee feel justified in committing fraud?
An employee might feel justified if they believe they are treated unfairly or have personal circumstances that they think warrant their actions. What is the purpose of safeguarding assets in a company?
Safeguarding assets prevents unauthorized use or theft, protecting the company's resources. How does the fraud triangle help companies understand fraud risk?
The fraud triangle helps companies identify and address the conditions that make fraud possible: opportunity, incentive, and rationalization. What is a dishonest act in the context of employee fraud?
A dishonest act is any action by an employee intended for personal benefit at the employer's expense, such as theft or falsifying records. How can companies address the incentive element of the fraud triangle?
Companies can address incentive by offering fair compensation and support to reduce financial pressures on employees. What is the impact of fraud on a company?
Fraud can result in financial losses, damaged reputation, and legal consequences for a company. Why is it important for companies to have policies and procedures?
Policies and procedures help establish clear expectations and controls to prevent and detect fraud. How can regular audits help prevent fraud?
Regular audits can identify weaknesses in internal controls and detect fraudulent activities early. What is meant by 'personal benefit' in the definition of fraud?
Personal benefit refers to any gain or advantage an employee receives from committing fraud, such as money or goods. How does employee rationalization make fraud more likely?
Rationalization allows employees to justify dishonest actions, making it easier for them to commit fraud without guilt. What is the role of management in preventing fraud?
Management is responsible for establishing and enforcing internal controls to minimize opportunities for fraud. How can a company respond if fraud is detected?
A company should investigate, take corrective action, and strengthen internal controls to prevent future fraud. What is an example of a policy that can reduce fraud risk?
Segregating duties so that no single employee controls all aspects of a transaction can reduce fraud risk. Why might an employee create fake invoices?
An employee might create fake invoices to divert company funds for personal use. How does the desire for a lavish lifestyle serve as an incentive for fraud?
The desire for a lavish lifestyle can motivate employees to commit fraud to obtain extra money for luxury items. What is the significance of daily cash register counts?
Daily cash register counts help detect discrepancies quickly, reducing the opportunity for theft. How can companies ensure compliance with laws through internal controls?
By implementing procedures that align with legal requirements, companies can ensure compliance and reduce legal risks. What is the effect of weak internal controls on fraud risk?
Weak internal controls increase the opportunity for fraud, making it easier for employees to commit dishonest acts. How can employee training help prevent fraud?
Training employees on company policies and ethical standards can reduce rationalization and increase awareness of fraud risks.
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