The Fraud Triangle
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CPA Auditing and Attestation (AUD) › The Fraud Triangle
The auditors rely on the fraud triangle as one's means of developing
a list of potential employees that might commit fraud
a criticism of management to the audit committed
a risk assessment
as evidence in a lawsuit
Explanation
The fraud triangle is used in the planning stage of the audit to assess risk. Risk is assessed in terms of each area of the fraud triangle and the auditor designs tests of the internal control system based on these areas.
An example of fraud could include all of the following except:
Misappropriation of assets
Intentionally misstating financial statements
Inaccurate accounting estimates
Knowingly providing an auditor with incorrect accounting information
Explanation
Inaccurate accounting estimates would likely be classified as an error rather than fraud. Fraud requires an intentional act, whereas an error is unintentional.
James Jones is the bookkeeper of Prestige Yachts, a Yacht builder for high net worth individuals. James sees the owner continually overcharging on options and giving himself raises. James hasn’t had a raise in years. James decides to cash checks for outstanding accounts and will replace them as soon as he gets the money. Using the fraud triangle, this is an example of
motive
means
justification
determination
Explanation
This is an example of a motive. The employee witnesses the employer overcharging customers and having not had a raise to justify the fraud based on motive.
James Jones is the bookkeeper of Prestige Yachts, a Yacht builder for high net worth individuals. The company owner decides to “do more with less” and requires James to record the accounts receivables and maintain the bank reconciliation. James decides to cash checks for outstanding accounts and will replace them as soon as he gets the money. He expects this to happen soon. Using the fraud triangle, this is an example of:
Justification
Determination
Rationalization
Opportunity
Explanation
This is an example of an opportunity. The firm has inappropriate segregation of duties creating an opportunity for the employee to both defraud the firm and cover up the act.
When planning an audit, the CPA auditor should document in the work papers the risk assessment of material misstatement of the financial statements due to fraud. Of the following, which should be included in the work paper documentation if the factors are identified and present?
Investigation of the risk factors
Those risk factors identified
A copy of the report of the risk factor to the company legal counsel
Discussion of the risk factor with the client
Explanation
During the planning stage of an audit, the engagement team must discuss the potential for misstatement due to fraud as well as the three factors. The team must also document the factors if identified.
Of the following statements about the fraud triangle, which is true?
Nonobservation of all three factors indicates no fraud
The CPA should determine whether and to what extent the factors are present as a part of the final review stage of the audit
The fraud risk factors should be discussed by engagement personnel during planning
The existence of all three factors indicates that fraud has occurred
Explanation
During the planning stage of an audit, the engagement team must discuss the potential for misstatement due to fraud as well as the three factors.