AUI3702 EXAM NOTES

Chapters 8: Risk of Fraud an Illegal Acts 1. Corruption a. Acts in which individuals wrongfully use their influence in a business transaction in order to procure some benefit for themselves or another person 2. Common fraud perpetrator red flags a. Living beyond their means b. Experiencing financial difficulties c. Excessive organizational pressure 3. Fraud a. Any illegal act characterized by deceit, concealment, or violation of trust 4. Misappropriation of assets a. Pilferage b. Embezzlement c. Defalcation (misappropriation of money) 5. fraudulent financial reporting a. acts that involve falsification of an organizations financial statements 6. occupational fraud a. fraud in the workplace a.i. falsification of financial statements . asset misappropriation . corruption 7. Governance a. The combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives 8. Risk assessment a. The identification and analysis of relevant risks to the achievement of an organizations objectives 9. Risk response a. An action, or set of actions, taken by management to achieve a desired risk management strategy 10. Fraud detection a. Occupational frauds are much more likely to be detected by a tip than by audits, controls, or other means 11. Tone at the top a. The entity-wide attitude of integrity and control consciousness, as exhibited by the most senior executives of an organization 12. Control environment a. The attitude and actions of the board and management regarding the significance of control within the organization 13. Fraud awareness a. Activities that help employees understand the purpose, requirements, and responsibilities of a fraud risk management program 14. Reasonable assurance a. A level of assurance that is supported by generally accepted auditing procedures and judgments 15. Regulatory and legal misconduct a. Includes conflicts of interest, insider trading, theft or competitor trade secrets, etc 16. Impact a. The severity of outcomes caused by risk events. Can be measured in financial, reputation, legal, or other types of outcomes 17. Likelihood a. The probability that a risk event will occur 18. Risk tolerance a. The acceptable levels of risk size and variation relative to the achievement of objectives 19. Preventive control a. An activity that is designed to deter unintended events from occurring 20. Collusion a. Acts involving two or more persons, working together, whereby established controls or procedures may be circumvented for the gain of those individuals 21. Detective control a. An activity that is designed to discover undesirable events that have already occurred 22. Legal privileges a. Working with legal counsel to protect the results of investigations, supporting working papers, and communications with counsel 23. Fraud perpetrators a. Generally fit one of two profiles: greater good oriented or scheming, self-centered types 24. Due professional care a. Applying the care and skill expected of a reasonably prudent and competent internal auditor 25. Professional skepticism a. The state of mind in which internal auditors take nothing for granted; they continuously question what they hear and see and critically assess audit evidence Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss/ or the perpetrator achieving a gain.