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    Manatad - Corporate Governance - Fraud and Error

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    1. The document distinguishes between two types of fraud: fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting involves intentional misstatements in financial statements by management to mislead users, while misappropriation of assets involves theft of entity assets, usually by employees in smaller amounts. 2. The fraud triangle identifies three elements necessary for fraud to occur: incentives, opportunities, and rationalization. Incentives include financial gain, pressure, and addictions. Opportunities arise from weak internal controls and complex organizational structures. Rationalization allows offenders to justify fraudulent actions. 3. All three elements of the fraud triangle are required for fraud to occur - the presence of only one or two elements

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    Manatad - Corporate Governance - Fraud and Error

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    1. The document distinguishes between two types of fraud: fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting involves intentional misstatements in financial statements by management to mislead users, while misappropriation of assets involves theft of entity assets, usually by employees in smaller amounts. 2. The fraud triangle identifies three elements necessary for fraud to occur: incentives, opportunities, and rationalization. Incentives include financial gain, pressure, and addictions. Opportunities arise from weak internal controls and complex organizational structures. Rationalization allows offenders to justify fraudulent actions. 3. All three elements of the fraud triangle are required for fraud to occur - the presence of only one or two elements

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    Fraud and error

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    Manatad_Corporate Governance_Fraud and Error

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    1. The document distinguishes between two types of fraud: fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting involves intentional misstatements in financial statements by management to mislead users, while misappropriation of assets involves theft of entity assets, usually by employees in smaller amounts. 2. The fraud triangle identifies three elements necessary for fraud to occur: incentives, opportunities, and rationalization. Incentives include financial gain, pressure, and addictions. Opportunities arise from weak internal controls and complex organizational structures. Rationalization allows offenders to justify fraudulent actions. 3. All three elements of the fraud triangle are required for fraud to occur - the presence of only one or two elements

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    46 views3 pages

    Manatad - Corporate Governance - Fraud and Error

    Uploaded by

    Pring Pring
    1. The document distinguishes between two types of fraud: fraudulent financial reporting and misappropriation of assets. Fraudulent financial reporting involves intentional misstatements in financial statements by management to mislead users, while misappropriation of assets involves theft of entity assets, usually by employees in smaller amounts. 2. The fraud triangle identifies three elements necessary for fraud to occur: incentives, opportunities, and rationalization. Incentives include financial gain, pressure, and addictions. Opportunities arise from weak internal controls and complex organizational structures. Rationalization allows offenders to justify fraudulent actions. 3. All three elements of the fraud triangle are required for fraud to occur - the presence of only one or two elements

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    of 3

    April Joy Calarian

    Activity 1: Types of Misstatements

    Distinguish between fraudulent financial reporting and misappropriation of assets.


    Discuss the likely difference between these two types of fraud on their fair
    presentation of financial statements. (20 points)

    Indubitably, fraud is one of those threats in a business for this entails intentional or
    purposeful illicit act which greatly affects the flow of business operations. It is hard to
    detect this kind of action due to the reason that everyone in the management can be a
    possible link of fraud especially those in charge with such workpapers.
    Fraudulent financial reporting and misappropriation of assets do have similarities
    and differences. First and foremost, the most common characteristic that they similarly
    possess is both of them are acts of fraud. These actions alter the documents and papers in
    different ways which in return compromises the company as a whole. The difference that
    arises among the two concepts is linked on the doer of the fraud. Fraudulent financial
    reporting entails intentional misstatements or it may be omissions of amounts as well as
    disclosures in the financial statements for the purpose blinding the financial statement
    users of their sound and healthy results. Due to this reason, it requires higher authority to
    perform such act including members of management and those charged with governance.
    Examples include manipulation, falsification or alteration of records or documents,
    recording of transactions without substance, intentional misapplication of accounting
    policies, and many more. On the other hand, misappropriation of assets is commonly
    performed among employees for this only pertains to theft of entity’s assets and amounts
    are relatively small and immaterial. Actions such as embezzling receipts, stealing entity’s
    assets such as cash, marketable securities and inventory, causing an entity to pay goods
    and services not received, using entity’s assets for personal use, and lapping of accounts
    receivable are few examples.
    Simply stating, fraudulent financial reporting and misappropriation of assets are
    both acts of fraud which only differs on the level of severity. Fraudulent financial reporting
    is much heavier than misappropriation of assets which makes it become labeled as
    management fraud in which the management team members are held countable. The other
    one corresponds only to minor acts of asset misappropriation wherein employees are to be
    questioned about.

    Activity 2: Fraud Triangle

    A. The fraud triangle identifies incentives, opportunities and rationalizations as the


    three elements associated with most frauds. Describe how each of these elements is
    necessary for fraud to occur.

     Incentive to Commit Fraud


    In committing fraud, the person who urges to do so has that particular motive which
    drives him to perform such act. It may stem from his eagerness to uplift himself or to
    upgrade his performance in such manner. Furthermore, to gain financial advantage or
    exact financial vengeance, one may engage in fraudulent behavior. Money gains, pressure
    from both internal and external sources, and addictions to drugs or gambling are a few
    examples of incentives for misappropriating assets in particular. Among other things, pay-
    out plans, debt covenants, greed, and other elements can result in fraudulent financial
    reporting.

     Opportunities to Commit and Conceal Fraud


    Opportunities for members in the management or employees to commit and conceal
    fraud may occur in a business due to lack of internal control systems and policies that
    govern thorough checking of documents as well as the behavior of each who are charged
    with governance. With that, they would be more motivated to do such things knowing that
    the company’s control is not that strict enough for them to get caught. Moreover, it may
    also stem from complicated or unstable organizational structure, sizable related-party
    transactions, and many more.

     Rationalization
    The ability of the offender to justify actions that are recognized as fraudulent is
    anticipated. The main causes of asset theft are employee mistreatment by the company, a
    sense of entitlement, or both. Anything from personal greed to business survival can lead to
    fraudulent action. The dishonest treatment given to the offenders also leads them to justify
    their dishonest behavior.

    B. If one of the three elements of the fraud triangle is not present, can fraud still be
    perpetrated? Explain.

    An entity with a low risk of fraud or one that is fraud-free will always prosper and
    run one of the best operations. It must therefore be carefully investigated and scrutinized.
    To prevent fraud, it is crucial to be aware of its prevalence as well as the variables that lead
    to it, such as how they relate to opportunity and why they involve incentives and
    rationalization. Therefore, in my opinion, all three requirements must be met for fraud to
    occur. The first is the motivation, or motive, which is what motivates a person to commit
    fraud and is largely dependent on the situation he finds himself in. Everyone has the
    potential to conduct fraud, and those opportunities are always present. The rewards that
    someone may receive can also occasionally be related to reasoning. He might adopt a
    worldview that justifies dishonest behavior as a result of the rewards he might receive.

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