Characteristics of Fraud - Internal Audit Department (2024)

FAQs

What are the elements of fraud in internal auditing? ›

The fraud triangle consists of three components: (1) Opportunity, (2) Incentive, and (3) Rationalization. Fraud refers to the deception that is intentional and caused by an employee or organization for personal gain.

One of the characteristics of an internal audit is that it limits the organization's governance, controls, risk management, and operations of the business. It is conducted based on the business owner's resolution to measure the efficiency of the business operations covered in the company.

The concept states that there are three components which, together, lead to fraudulent behavior. They are (1) a perceived un-shareable financial need (motive/pressure), (2) a perceived opportunity to commit fraud, and (3) the rationalization of committing the fraud.

General Fraud Indicators

Management override of key controls. Inadequate or weak internal controls. No written policies and procedures. Overly complex organizational structure.

The three categories of frauds are corruption, asset misappropriation and financial statement fraud. There are three types of corruption fraud: conflicts of interest, bribery, and extortion.

Internal auditors should not investigate fraud unless they have the specific experience and expertise required to do so. activity designed to add value and improve an organization's operations. Its role includes detecting, preventing, and monitoring fraud risks and addressing those risks in audits and investigations.

An internal audit offers risk management and evaluates the effectiveness of many different aspects of the company. Types of internal audits include financial, operational, compliance, environmental, IT, or for a very specific purpose.

The Fraud Triangle hypothesizes that if all three components are present — unshareable financial need, perceived opportunity and rationalization — a person is highly likely to pursue fraudulent activities.

Under common law, three elements are required to prove fraud: a material false statement made with an intent to deceive (scienter), a victim's reliance on the statement and damages. A material false statement.

What are three characteristics of a good fraud investigation report? ›

Indicate THREE characteristics of a good fraud investigation report. A good fraud investigation report should convey all evidence needed, add credibility to the investigation, and accomplish the objectives of the case.

Most frauds are identified through tips, internal controls, and management review. Tips from various sources, effective internal controls, and regular management review of financial statements and operational reports help uncover anomalies or irregularities indicative of fraud.

Look out for the following red flags

Refusal to implement internal countermeasures. Skipping approval steps. Living a lifestyle above their means or lavishing gifts on colleagues. Failing to keep appropriate or accurate records/receipts.

According to Albrecht, the fraud triangle states that “individuals are motivated to commit fraud when three elements come together: (1) some kind of perceived pressure, (2) some perceived opportunity, and (3) some way to rationalize the fraud as not being inconsistent with one's values.”

Conceived by American criminologist Donald Cressey as a model to explain workplace fraud. It comprises the three elements Cressey argued must be present for internal fraud to occur: Pressure, Opportunity and Rationalization.

According to Albrecht, the fraud triangle states that “individuals are motivated to commit fraud when three elements come together: (1) some kind of perceived pressure, (2) some perceived opportunity, and (3) some way to rationalize the fraud as not being inconsistent with one's values.”

Key Components of the Fraud Investigation Process

Engaging both internal and external parties with appropriate expertise. Gathering intelligence. Conducting transaction analysis. Applying computer forensics.

In addition to addressing incentive, opportunity, and rationalization, the authors' four-sided “fraud diamond” also considers an individual's capability: personal traits and abilities that play a major role in whether fraud may actually occur even with the presence of the other three elements.