Ask Joey ™ a Question

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”)!


You might also be interested in...

  • Are you looking for a CPA review course?

    Universal CPA Review is the only CPA review course that has explanation videos for every single multiple choice question. These videos focus on helping identify the big picture and developing a systematic approach to tackling the concept. Our content creators are masters of their craft. They know what it takes to pass the exam and […]

  • How is audit risk impacted with changes in the assessment of inherent risk, control risk, and detection risk?

    Audit risk is the combination of inherent risk, control risk, and detection risk. Remember, the audit team will “assess” inherent risk and control risk. Based on the assessment, then audit team will set detection risk, which ultimately impacts the amount of substantive procedures that must be performed. So in the visual below, you can see […]

  • Scores Came Out: I Just Got a 73% on Audit, Now What?

    Yesterday morning a student interested in trying Universal CPA Review reached out and expressed concern with the fact that they just took audit for the fourth time and scored a 73%.  Audit is a lot of candidate’s “kryptonite” and the reason is because it is sort of like skiing. Easy to learn, extremely hard to […]