2.

Adverse relationships between the entity and employees with access to cash or other assets
susceptible to theft may motivate those employees to misappropriate those assets.

-In simple terms, when an entity (like a company) has employees who can access things like cash
or valuable items, if those employees have a bad relationship with the entity, it may make them
more likely to steal or take those things for themselves.

For example, if a retail store has a cashier who feels mistreated by their employer or supervisor,
that cashier may be more tempted to steal money from the cash register when they have the
opportunity. Similarly, if an office worker feels underpaid and undervalued by their company,
they may be more likely to steal office supplies or equipment to compensate for their perceived
lack of compensation. These adverse relationships can create a sense of justification for the
employee to take things that don't belong to them.

B.

1. Certain characteristics or circumstances may increase the susceptibility of assets to

misappropriation.

- there are certain things about assets that make them more likely to be stolen or used
improperly. For example, if an asset is small and valuable, like a diamond, it may be more prone
to misappropriation than a large and less valuable asset, like a building.

2. Inadequate internal control over assets may increase the susceptibility of misappropriation of
those assets.

- if a company doesn't have good systems in place to keep track of their assets, those assets are
more likely to be stolen or misused. For example, if a company doesn't have a way to monitor
who has access to a valuable asset or doesn't keep track of when it's being used, it's easier for
someone to take it without anyone noticing.

In summary, certain characteristics of assets can make them more susceptible to

misappropriation, and if a company doesn't have good internal controls to protect its assets,
they are also more likely to be misappropriated.

C.

1. Disregard for the need for monitoring or reducing risks related to misappropriation of assets.

- if a company doesn't pay attention to the risks related to assets being stolen or misused, they
are more likely to be misappropriated. For example, if a company doesn't install security
cameras in areas where valuable assets are kept, it's easier for someone to steal them.

2. Disregard for internal control over misappropriation of assets by overriding existing controls
or by failing to correct known internal control deficiencies.
- if a company's management ignores internal controls designed to prevent asset
misappropriation or doesn't fix known issues with those controls, it increases the risk of assets
being misappropriated. For example, if a manager approves a transaction that violates company
policies designed to prevent fraud, it could lead to asset misappropriation.

3. Behavior indicating displeasure or dissatisfaction with the entity or its treatment of the
employee.

- if an employee shows behavior that indicates they are unhappy with the company or how they
are being treated, they may be more likely to misappropriate assets. For example, if an
employee is passed over for a promotion, they thought they deserved, they may be more likely
to steal from the company.

4. Changes in behavior or lifestyle that may indicate assets have been misappropriated.

- if an employee suddenly starts living a lifestyle that seems to be beyond their means, it may be
a sign that they are misappropriating assets. For example, if an employee starts driving a luxury
car and taking exotic vacations that they can't afford on their salary, it could be a sign that they
are stealing from the company.

5. Tolerance of petty theft.

- if a company has a culture of tolerating small thefts, it could lead to larger thefts or
misappropriations in the future. For example, if a manager overlooks an employee taking office
supplies home for personal use, the employee may be more likely to steal larger items later on.

In summary, management needs to implement proper controls and monitor for signs of
misappropriation to prevent it from occurring. This includes paying attention to risks, fixing
known control deficiencies, addressing employee grievances, watching for changes in behavior
or lifestyle, and not tolerating small thefts.

FFR may be accomplished…

1. Manipulation, falsification (including forgery), or alteration of accounting records or

supporting documentation from which the financial statements are prepared.
- means that someone has intentionally changed or falsified accounting records or
supporting documents used to prepare financial statements. For example, an
employee may change the amount of a sale in the company's sales records to make
it look like the company is doing better than it actually is.
2. Misrepresentation in or intentional omission from, the financial statements of events,
transactions, or other significant information
 - means that someone intentionally leaves out important information or presents
information in a misleading way in the financial statements. For example, a company
may not disclose a pending lawsuit in their financial statements, which could have a
significant impact on the company's financial performance.
3. Intentional misapplication of accounting principles relating to amounts, classification,
manner of presentation, or disclosure
- means that someone intentionally applies accounting principles in a way that is
incorrect or misleading in the financial statements. For example, a company may use
a different method of depreciation that artificially inflates the value of their assets.
4. Fraudulent financial reporting involves intentional misstatements, including omissions of
amounts or disclosures in financial statements, to deceive financial statement users. It
can be caused by the efforts of management to manage earnings in order to deceive
financial statement users by influencing their perceptions as to the entity’s performance
and profitability.
- means that someone intentionally misstates financial information in the financial
statements to deceive users and make the company look better than it actually is. For
example, a company may manipulate their financial statements to show higher
earnings to attract investors or to meet performance targets.

Incentive/Pressure

-means that when there is pressure on management to meet financial targets or goals that may
be unrealistic, it creates an incentive or pressure to commit fraud in order to make the company
look like it is meeting those goals. This pressure can come from sources outside or inside the
company, such as investors or board members who are expecting a certain level of performance.

For example, imagine a company that is struggling financially and has made promises to
investors that it will turn things around in the next quarter. The company's management team is
under a lot of pressure to meet these expectations, but they know that the company is not
doing as well as they had hoped. In this situation, there may be an incentive or pressure to
manipulate the financial statements to make it look like the company is doing better than it
actually is. This could involve things like inflating sales numbers or hiding expenses to make the
company's profits look higher than they actually are. The management team may feel like they
have no other choice but to commit fraud in order to meet the financial goals that have been
set for them.

Opportunities

- When someone believes that they can get away with cheating because they have
access to information or control within a system, that's a perceived opportunity to
commit fraud. For example, an employee who knows the weaknesses in the
company's financial controls may be more likely to steal money.
 Rationalization
- Sometimes, people can convince themselves that committing fraud is okay, even if it
goes against their values. These people may have a certain attitude or ethical values
that allow them to justify dishonest actions. However, even people who are typically
honest can be pushed to commit fraud if they are under enough pressure.
For example, imagine an employee who is struggling to make ends meet and is faced
with the opportunity to embezzle money from their employer. Even if the employee
has always been honest, the pressure of financial difficulty could lead them to
rationalize the dishonest act and commit fraud.

Material Weakness

1. A material weakness refers to a problem or several problems with a company's internal

control over financial reporting.
2. These problems increase the chance that the company's financial statements may have
mistaken or errors.
3. Material weaknesses make it hard to catch and fix these mistakes in a timely manner.
4. The chance and impact of possible errors are so high that the company cannot confirm
that its internal control over financial reporting is effective.
5. A material weakness doesn't necessarily mean that there has been a mistake in the
financial statements.
6. However, if not addressed, the problem with internal control could lead to a significant
error in the financial statements.

Primary...

Management is responsible for designing and implementing internal controls to prevent and
detect fraud. They should establish policies and procedures that reduce the risk of fraudulent
activities, and ensure that employees understand and follow these controls.

Those charged with governance of the entity, such as the board of directors or trustees, also
have a responsibility to oversee management's efforts to prevent and detect fraud. They should
review and monitor the effectiveness of the internal controls put in place by management, and
take appropriate action if fraud is suspected or detected.

Overall, both management and those charged with governance of the entity have a role to play
in preventing and detecting fraud, but management is primarily responsible for implementing
the necessary controls to mitigate the risk of fraudulent activities.

Management…

Management has a responsibility to prioritize fraud prevention and create a culture of honesty
and ethical behavior within the organization.
To prevent fraud, management should establish policies and procedures that reduce the risk of
fraudulent activities, and ensure that employees understand and follow these controls. They
should also regularly review and update these policies and procedures to adapt to changes in
the business environment.

Creating a culture of honesty and ethical behavior means fostering an environment where
employees feel comfortable reporting suspected fraudulent activities without fear of retaliation.
Management can achieve this by leading by example and promoting integrity and transparency
in all business dealings. They should also provide employees with training and support to help
them recognize and report fraud.

Oversight…

Oversight by those charged with governance involves ensuring that an organization's leaders
are promoting a culture of honesty and ethical behavior, and that they are aware of the
potential for individuals to override controls or exert inappropriate influence over the financial
reporting process.

For example, a company's board of directors may implement policies and procedures to prevent
fraud, and regularly review financial statements and internal controls to ensure they are
operating effectively. They may also conduct regular training sessions to reinforce ethical
behavior among employees and encourage them to report any suspected violations.

Important…

Fraud prevention and deterrence are important because they help reduce the opportunities for
fraud to occur and discourage individuals from committing fraud by increasing the likelihood of
detection and punishment.

For example, implementing internal controls, such as separation of duties and regular
monitoring of financial transactions, can reduce the opportunity for fraud to occur. Additionally,
the threat of legal action and reputational damage can deter individuals from committing fraud.

Impact...

Fraud can have a significant impact on an entity, including loss of credibility and reputation,
harm to relationships with customers, vendors, and employees, and a drastic reduction in
economic value.

For example, if a company is caught committing fraud, its customers and stakeholders may lose
trust in the company, resulting in a decline in sales and revenue. The company may also face
legal action and financial penalties, which can further impact its economic value.
FFR through earnings

- Income smoothing, also known as earnings management, refers to the practice of choosing accounting
methods and making accounting principle changes to produce a specified income level or trend. - This
slide will discuss the motivations behind earnings management, which include meeting internal targets,
meeting external expectations, providing income smoothing, and providing window dressing for an IPO
or a loan. Explain these two separate sentences in brief and simple term and give example

Income smoothing or earnings management is a practice of manipulating financial statements to achieve

a certain income level or trend. Motivations behind this practice include:

Meeting internal targets: Companies set internal targets for financial performance, and earnings
management can help them meet those targets. For example, if a company's target is to achieve a
certain profit margin, they may use accounting methods to manipulate their earnings to meet that
target.

Meeting external expectations: Companies may engage in earnings management to meet external
expectations, such as analysts' forecasts or market expectations. This can help maintain or increase the
company's stock price or reputation. For example, if analysts expect a company to report a certain level
of earnings per share, the company may use accounting methods to meet or exceed those expectations.

Providing income smoothing: Earnings management can be used to smooth out fluctuations in income
over time, creating a more consistent income trend. This can help to reduce investor uncertainty and
increase investor confidence in the company's future prospects.

Providing window dressing for an IPO or a loan: Companies may manipulate their financial statements to
make their financial position look more attractive when seeking an initial public offering (IPO) or a loan.
For example, a company may overstate its earnings to make it look more profitable to potential investors
or lenders.