Consideration of Fraud in an Audit Name University Consideration of Fraud in an Audit INTRODUCTION: The corporate world has recently faced large corporate scandals. These relate to fraudulent activities in an organization which had caused losses of billions of dollars to public…
FRAUD Fraud is a word used in broader concepts and approaches. It basically refers to any illegal action characterized by deceit and concealment which isn’t conducted under any violence, force or threat. The aim of every fraudulent activity is an undue advantage which could be institutional or personal. (Flostoiu.2012) Characteristics of Fraud: Fraud results in victim that loses a benefit because of the criminal’s fraud. It is represented by a series of illegal actions and irregularities which are all planned with the intention to deceive. Fraud is also referred to activities which involve concealment of information that was to be revealed by an obligation and intended omission of certain information or documents including misstatements and misrepresentation of information. Fraud also includes falsification of financial situations, corruption and theft. It is always important to distinguish between a fraud and error. The results of both error and fraud could be the same, but fraud is committed intentionally while error happens unintentionally. (Flostoiu.2012) Fraud Triangle Theory: A fraud triangle is a model which discloses the factors found in fraudsters at all levels of organization. This theory researched about the factors that force honest people to commit fraud. These factors could be summed as Pressure/Incentive, Opportunity and Rationalization that put an individual in a position to conduct fraud. (Dorminey, Scott, Kranacher & Riley. 2010) In a Fraud Triangle pressure refers to situations that put mental pressure/incentive on an individual which forces him to commit fraud. These situations could include excessive credit card debts, gambling debts, extended unemployment, family or peer pressures, unbearable expenditures and financial difficulties etc. For an auditor, pressure is difficult to identify in a fraudster as there is no personal interaction with him. (Dorminey, Scott, Kranacher & Riley. 2010) Opportunity as the word suggests, is an instance where the fraudster finds a loophole in the controls which prevent fraud. An employee usually finds a chance where he can commit fraud without being detected. This opportunity for an employee can arise from weak internal controls and inability of frauds being detected, lack of training, weak ethical culture where honesty in doing business isn’t considered a priority and lack of supervision etc. Most opportunities arising situations for fraud include lack of internal controls like segregation of duties not being implemented properly. (Dorminey, Scott, Kranacher & Riley. 2010) Rationalization refers to that state of mind where the fraudster convinces himself that whatever fraud he has committed was either not wrong or even it was wrong it an be corrected later on by returning the money or compensating for it. Another state of rationalization is found when a fraudster convinces himself that he deserves the stolen money. The reason for this rationalization could be the unfair treatment in the organization like a recent promotion or increment not being offered which forces him to believe that has been victimized. (Kassem, Rasha, & Higson, Andrew. 2012) Recent researchers have extended the Fraud Triangle and added a fourth factor to the triangle making it as a diamond. This factor is the capability of the fraudster to conduct fraud. Capabilities include the traits of the fraudster i.e. in presence of the three factors of fraud ...
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The basic premise of the research is to generate an understanding about fraud and role of external audit; how frauds have taken place in Canadian organizations, its impact and the limitations of external audit to face the problems of fraudulent activities. Fraud can be defined as a pan planned activity which is intended to betrayal another party.
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