Fraud and error Factors

 Errors:  Fraud involves three basic factors:

¾ An unintentional mistake made within the business ¾ incentive or pressure to commit fraud,
through carelessness or ignorance. ¾ a perceived opportunity to do so and
¾ some rationalisation of the act.
 Fraud:
¾ The intentional act of deception, misrepresentation or  Often referred to as:
concealment of information by one or more individuals ¾ Dishonesty
to obtain an unjust or illegal advantage resulting in the
¾ Motivation
removal of funds or assets from a business or the
intentional misrepresentation of the financial position of ¾ Opportunity.
a business.

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Types of fraud Responsibilities

 Fraudulent reporting  Management

¾ Deception ¾ Primary responsibility for prevention AND detection of
¾ Misrepresentations fraud and error
¾ Deliberate misapplication of accounting principles
 Auditors
 Misappropriation of assets ¾ Are not, and cannot be, held responsible for prevention
¾ Theft
of fraud and error
¾ They must however have a reasonable expectation of
¾ Embezzlement
detecting material error and fraud plus a healthy
¾ Personal use of company assets
professional scepticism
¾ False employees
¾ Personal goods and services

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Risk factors Fraud examples

 Consider:  Payroll
¾ the incentives and/or pressure to commit fraud;
 Purchasing
¾ the opportunities to do so; and
¾ the attitude and rationalisation of the fraudster.  Sales

 Inventory

 Cash

 Dummy employees, bid fixing, kickbacks, advance

fees, long-firm, phising, Ponzi scheme, salami
technique, teeming and lading, window dressing
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