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The Fraud Triangle

In: Business and Management

Submitted By casarah22
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The Fraud Triangle

Abstract

In 2002 SAS No. 99, Consideration of Fraud in a Financial Statement Audit describes the difference between material misstatements due to errors and intentional fraud and defines two types of intentional fraud: fraudulent financial reporting and misappropriation of assets. SAS No. 99 also introduced D. R. Cressey’s theory of the fraud triangle which is so named because it consists of three conditions that are generally present when fraud occurs: incentive/pressure, opportunity, and attitude/rationalization.

Introduction

This paper reflects on SAS No. 99 to describe the difference between material misstatements due to errors and intentional fraud which includes fraudulent financial reporting and misappropriation of assets. It also describes the fraud triangle theory proposed by D. R. Cressey. Think back to when you were in elementary school during fire safety week when the fire department would come and visit. Do you recall the fireman explaining what can be referred to as the fire triangle? That is, the description of what is necessary for fire to exist and continue. In order to create fire you need three things: fuel, oxygen, and heat. To put out (or prevent) the fire you would need to remove one of those three sides to the triangle. You could stop the fire by removing either the fuel, oxygen, or heat. This is a simple analogy for the fraud triangle. Just as there are three sides to the fire triangle there are three sides to the fraud triangle. You can prevent fraud by removing one of the sides. The three sides to the fraud triangle, all of which need to be present for fraud to take place, are: 1) Incentive/pressure 2) Opportunity 3) Attitude/rationalization

Errors and Fraud

Material misstatement of the financial statements can occur through errors or through intentional fraud. Errors are…...

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