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What factors should be assessed to understand the risk of fraud?

When assessing the existence of fraud, try to think like a fraudster! Try to understand where the opportunity to commit fraud is, where there are any pressures or incentives, and how an employee might rationalize fraud. The three key factors of fraud to assess include opportunities, pressure & incentives, and rationalization & attitude.

1) Opportunities: Opportunity reflects the risk that members of company management will have the opportunity to take advantage of ineffective internal control procedures or override those controls in order to take advantage for their own self-interest. Management opportunities can appear in various different forms, but typically they will appear when management believes there are weaknesses within the company believes that nobody will notice if assets are taken from the company.

2) Pressure & incentives: Incentives and pressure are common reasons for management to become tempted to commit fraud. Pressures can be due to financial needs and will be used to motivate company personnel for committing fraud. Incentives are reasons for management to feel motivated to commit fraud (e.g. monetary gain).

3) Rationalization & attitude: Managements rationalization and overall attitude can become fraud risk factors when assessing a company’s internal controls. Rationalization can relate to a person frequently justifying reasons for committing fraud (e.g. “I will pay the company back when I receive my next bonus”)!


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