Which of the following statements is not true?
Options:
a) Management fraud is more difficult to detect than employee fraud b) Internal control system reduces the possibility of occurrence of employee fraud and management fraud c) The auditor’s responsibility for detection and prevention of errors and frauds is similar. d) All statements are correct. |
The Correct Answer Is:
b) Internal control system reduces the possibility of occurrence of employee fraud and management fraud
The correct answer to the question is b) “Internal control system reduces the possibility of occurrence of employee fraud and management fraud.” The reason this statement is not entirely accurate is because while an internal control system significantly reduces the likelihood of employee fraud, it may not be as effective in preventing management fraud. Here’s a detailed explanation:
Explanation of Correct Answer: b) Internal control system reduces the possibility of occurrence of employee fraud and management fraud
Internal control systems are designed to safeguard a company’s assets, ensure financial accuracy, and enforce compliance with laws and regulations.
They consist of policies, procedures, and mechanisms put in place by management to prevent and detect errors, fraud, and theft. These controls can include segregation of duties, authorization processes, physical safeguards, and regular audits.
When it comes to employee fraud, a robust internal control system indeed plays a crucial role in mitigating risks.
For instance, segregation of duties ensures that no single employee has complete control over a transaction from beginning to end, reducing the opportunity for fraudulent activities. Regular audits and checks can also catch discrepancies or irregularities early, minimizing the impact of employee fraud on the organization.
However, management fraud can be more intricate and challenging to detect. Management typically holds significant authority and can override or manipulate internal controls.
They might exploit their positions to perpetrate fraudulent acts without being easily detected by traditional control measures. Their ability to override or influence controls makes it more complex to prevent and detect management fraud solely through an internal control system.
Explanation of Why Other Answers are Not Correct:
a) Management fraud is more difficult to detect than employee fraud:
This statement is generally true. Management is often in a position to override controls, manipulate financial information, or disguise fraudulent activities more effectively compared to lower-level employees. The sophistication and access of management often make their fraudulent actions harder to detect.
c) The auditor’s responsibility for detection and prevention of errors and frauds is similar:
This statement is not entirely accurate. While auditors are responsible for detecting both errors and frauds, their primary focus is on detecting material misstatements due to fraud.
However, preventing fraud is not within the auditor’s scope; their role is primarily to assess the risk of fraud and design their audit procedures accordingly. The responsibility for preventing fraud lies with management and the implementation of effective internal controls.
d) All statements are correct:
This option is incorrect as discussed above. The statement in option b is not entirely accurate as internal controls, while effective against employee fraud, may not be as potent against management fraud.
In essence, while internal controls are crucial in minimizing the risks of employee fraud, their effectiveness in preventing management fraud is limited due to the potential ability of management to override or manipulate these controls.
Detecting and preventing management fraud often requires a combination of measures beyond internal controls, such as a robust ethical culture, external audits, thorough investigation, and oversight mechanisms.
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