5.

5 FRAUD SCHEMES
Fraud schemes can be classified in a number of different ways. For purposes of discussion,
this section presents the ACFE classification format. Three broad categories of fraud
schemes
are defined: fraudulent statements, corruption, and misappropriation of assets
Fraudulent statements are associated with management fraud. Whereas all fraud
involves some form of financial misstatement, to meet the definition under this class
of fraud scheme the statement itself must bring direct or indirect financial benefit to
the perpetrator. In other words, the statement is not simply a vehicle for obscuring or
covering a fraudulent act.
Corruption involves an executive, manager, or employee of the organization in
collusion with an outsider. Four principal types of corruption: bribery, illegal gratuities,
conflicts of interest, and economic extortion.
BRIBERY. Bribery involves giving, offering, soliciting, or receiving things of
value to influence an official in the performance of his or her lawful duties.
ILLEGAL GRATUITIES. An illegal gratuity involves giving, receiving, offering,
or soliciting some- thing of value because of an official act that has been
taken. This is similar to a bribe, but the transaction occurs after the fact.
CONFLICTS OF INTEREST. Every employer should expect that his or her
employees will conduct their duties in a way that serves the interests of the
employer. A conflict of interest occurs when an employee acts on behalf of a
third party during the discharge of his or her duties or has self-interest in the
activity being performed.
ECONOMIC EXTORTION. Economic extortion is the use (or threat) of force
(including economic sanctions) by an individual or organization to obtain
something of value.
Asset Misappropriation
The most common fraud schemes involve some form of asset misappropriation in
which assets are either directly or indirectly diverted to the perpetrator’s benefit.
5.6 Internal Control Concepts and Techniques
The internal control system comprises policies, practices, and procedures employed by the
organization to achieve four broad objectives:
1. To safeguard assets of the firm.
2. To ensure the accuracy and reliability of accounting records and information.
3. To promote efficiency in the firm’s operations.
4. To measure compliance with management’s prescribed policies and procedures.
Modifying Assumptions
Inherent in these control objectives are four modifying assumptions that guide designers
and
auditors of
MANAGEMENT RESPONSIBILITY. This concept holds that the establishment and
maintenance of a system of internal control is a management responsibility. This point
is made eminent in SOX legislation.
REASONABLE ASSURANCE. The internal control system should provide reasonable
assurance that the four broad objectives of internal control are met in a cost-effective
manner. This means that no system of internal control is perfect and the cost of
achieving improved control should not outweigh its benefits.