Fraud Risk Assessment Flashcards

Which of the following scenarios illustrates the 'pressure' element of the Fraud Triangle in a financial statement fraud context?

Answer: A CEO must meet Wall Street earnings forecasts to prevent stock options from expiring worthless

Financial pressure on the CEO to meet earnings targets represents the pressure element, creating the motivation necessary for financial statement fraud.

Which fraud risk assessment output is most useful for communicating results to the board of directors?

Answer: A risk heat map showing likelihood and impact of key fraud risks

A risk heat map provides a visual, high-level summary of fraud risks that is appropriate for board-level audiences who need strategic rather than operational detail.

An organization discovers that its fraud risk assessment failed to identify a significant payroll fraud. Which assessment weakness most likely caused this gap?

Answer: The assessment team lacked subject matter expertise in payroll processes

Lack of subject matter expertise in the area being assessed is a common cause of fraud risk gaps, as assessors may not know what schemes are possible in that function.

Which of the following is the MOST effective method for identifying fraud risks that insiders are unlikely to voluntarily disclose during interviews?

Answer: Anonymous employee surveys

Anonymous surveys allow employees at all levels to report concerns without fear of identification, surfacing fraud risks that structured interviews with management would miss.

Which of the following describes a 'pervasive' fraud risk versus a 'localized' fraud risk?

Answer: Pervasive risks affect the entire organization; localized risks affect specific accounts or processes

Pervasive fraud risks — such as management override — can affect all financial statement assertions, while localized risks are confined to specific processes or accounts.

Which of the following is the primary purpose of conducting a fraud risk assessment prior to an internal audit engagement?

Answer: To identify areas where audit resources should be focused based on fraud vulnerability

A pre-engagement fraud risk assessment helps internal auditors allocate limited resources to the processes and accounts most susceptible to fraud.

Which of the following changes in financial ratios is MOST associated with increased risk of revenue fraud?

Answer: Rising revenue growth that significantly outpaces industry peers with no clear business driver

Revenue growth that significantly exceeds industry benchmarks without a clear business explanation is a classic red flag for fictitious revenue recognition or channel stuffing.