Case 3 Answers

Q: What is management fraud?

A: Management fraud is deliberate fraud committed by management that injures investors and creditors through materially misstated information.

Q: How do auditors quantify materiality?

A: Materiality is a matter of professional judgment that must be decided upon by the engagement partner on each audit engagement. The best rule of thumb seems to be that anything less than 5% is probably not material and anything more than 10 percent probably is material.

Q: Understand internal control documentation

A: Misappropriations of assets usually as a result of employee theft and the resultant attempt to conceal this theft through erroneous journal entries.

Q: Types of motives to commit fraud

A:

1. Psychotic motivation is relatively rare, but it is characterized by the habitual criminal who steals simply for the sake of stealing

2. Egocentric motivations drive people to steal to achieve more personal prestige.

3. Ideological motivations are held by people who think their cause is morally superior and they are justified in making someone else a victim.

4. Economic benefits are by far the most common motivations in business frauds. The economic motive is simply a need for money, and at times it can be intertwined with egocentric and ideological motivations.

Q: What is the fraud triangle?

A: The first condition is the Motivation. A motive is some type of pressure experienced by a person that is believed to be unshareable with friends and confidants. The second condition is is Opportunity. An opportunity is an open door for solving the unshareable problem by violating some type of trust. The violation may be a circumvention of existing internal control activities, or it may be simply taking advantage of an absence or lapse of a control activity in an entity. It usually happens when there is an absence of important internal control activity. The third condition is Rationalization. They person finds a way to describe the...