Fraud Risk Assessment Flashcards

In the context of a fraud risk assessment, which of the following best defines residual fraud risk?

Answer: The risk of fraud that remains after management has implemented internal controls to mitigate identified threats.

Residual risk is the level of risk that remains after controls and other mitigation measures have been put in place to address a threat. In contrast, inherent risk is the risk that exists before any controls are applied. A fraud risk assessment aims to identify inherent risks, evaluate the effectiveness of controls, and determine the resulting residual risk.

A Certified Fraud Examiner is leading a fraud risk assessment for a manufacturing company. The team has identified various potential fraud schemes. According to the COSO/ACFE Fraud Risk Management Guide, what is the next logical step in the process?

Answer: Assess the likelihood and significance of the identified fraud risks.

After identifying potential fraud schemes, the next step in a structured fraud risk assessment is to assess the likelihood of each risk occurring and the potential significance (or impact) if it did. This analysis allows the organization to prioritize risks and determine where to focus its control activities. Implementing controls or starting investigations before this analysis would be premature.

An organization decides to stop offering credit card payments for online sales to eliminate the risk of chargeback fraud. This is an example of which type of fraud risk response?

Answer: Risk Avoidance

Risk avoidance is a response strategy where the organization decides to exit or not engage in the activities that give rise to the risk. By ceasing to accept credit card payments, the company is avoiding the associated chargeback fraud risk entirely. Mitigation involves reducing the risk, transfer involves sharing it (like insurance), and acceptance means taking no action.

Which of the following activities is MOST critical for evaluating the operating effectiveness of existing anti-fraud controls during a fraud risk assessment?

Answer: Conducting transactional testing and observing control activities.

While reviewing policies (design effectiveness) and interviewing management are important, evaluating operating effectiveness requires determining if the controls are actually working as intended. This is best accomplished through activities like testing a sample of transactions to see if the control was applied correctly, observing employees performing control activities, and conducting walkthroughs.

According to the principles of a sound fraud risk management program, which of the following is considered a foundational component?

Answer: A strong governance structure and a commitment to ethical conduct from senior management.

An effective fraud risk management program is built upon a strong governance foundation. This includes a clear commitment from the board and senior management, the establishment of clear ethical policies, and assigning specific roles for fraud prevention. Without this 'tone at the top,' even the best controls and software can fail.

During a fraud risk assessment workshop for a hospital's billing department, participants are asked to consider incentives, opportunities, and rationalizations that could lead to fraudulent activity. This exercise directly relates to which classic fraud theory?

Answer: The Fraud Triangle

The Fraud Triangle, developed by Donald Cressey, posits that fraud is likely to occur when three elements are present: a perceived pressure (incentive), a perceived opportunity, and a way to rationalize the dishonest act. Brainstorming these elements is a key technique in identifying specific fraud risks within an organization.