Fraud Risks

At Delford Retail, a long-serving warehouse supervisor has been passed over for promotion three times and tells colleagues the company owes him for years of unrewarded effort. He begins removing stock for personal use, telling himself he is merely taking what he is already due. Which element of the fraud triangle does the supervisor's reasoning most directly illustrate?

• AOpportunity, because his day-to-day access to the warehouse and its stock gives him the practical means to take goods without being detected.
• BPressure, because an unavoidable financial obligation is compelling him to find extra funds quickly through dishonest and improper means.
• CAsset misappropriation, because employee theft of inventory is one of the most common fraud schemes that organisations have to face.
• DRationalisation, because he constructs a justification that recasts the theft as merely collecting the compensation he believes he is owed.check_circle Correct

Why A is wrong: Access to stock is genuine opportunity, but the question asks about the supervisor's reasoning, and his self-justification is the classic marker of rationalisation rather than the means of access.

Why B is wrong: Pressure is a real element, but the scenario shows resentment and a justification rather than an inescapable financial obligation forcing his hand, so rationalisation is the better fit.

Why C is wrong: This names a scheme rather than a triangle element; removing stock is asset misappropriation, but the question asks which element his reasoning illustrates, which is rationalisation.

Why D is correct: Correct. Rationalisation is the mental step that lets an otherwise honest person excuse dishonest conduct; recasting theft as claiming what he is owed is precisely this element of the triangle.

At Marrick Bank, the internal auditor is evaluating whether the anti-fraud response is adequate for the assessed exposure. Management's own fraud risk assessment rates procurement fraud as high, yet the only anti-fraud measure in place is an annual staff awareness email; there is no data analysis of split or duplicate purchase orders and no independent review of new suppliers. How should the auditor evaluate this arrangement?

• AThe response is adequate, because at least one anti-fraud measure covering procurement is in place and staff are reminded of fraud risk once every year through the awareness email.
• BThe fraud risk responses are not commensurate with the high assessed procurement-fraud exposure, and this gap between exposure and response should be reported as a weakness in fraud risk management.check_circle Correct
• CThe auditor should build and run the split and duplicate purchase-order analytics during the engagement so that the missing detective control is operating before the report is finalised.
• DThe auditor should conclude that procurement fraud is already occurring at the bank, because a high exposure combined with only an awareness email means undetected fraudulent purchase orders are certain to exist.

Why A is wrong: The existence of a single measure is not the test; a high assessed exposure met only by an annual reminder leaves the response far weaker than the risk it is meant to address.

Why B is correct: Evaluating adequacy means comparing the response to the assessed exposure; a high procurement-fraud rating served only by an awareness email is a clear mismatch, which the auditor reports as a fraud risk management weakness.

Why C is wrong: Identifying the missing control is right, but designing and operating the analytics is a management control activity; performing it would place internal audit in a first line role and compromise later assurance.

Why D is wrong: A weak response raises the chance fraud goes undetected, but it does not prove fraud is happening; concluding that fraud is occurring without evidence oversteps the auditor's role of reporting the control gap.

During a payroll assurance engagement at Tenby Logistics, the internal auditor uncovers indicators strongly suggesting that a supervisor has created several ghost employees and is diverting their wages. Uncovering fraud was not the engagement's objective. The chief financial officer, once told informally, instructs the auditor to keep the finding quiet and personally run the full investigation to a disciplinary conclusion. What is the BEST next action for the auditor?

• APromptly report the indicators to the appropriate parties designated in the fraud response protocol, such as the audit committee, and support any resulting investigation rather than leading it or presuming guilt.check_circle Correct
• BContinue the payroll engagement as planned and simply record the ghost-employee indicators as one observation in the final report, which is due to the audit committee in several weeks' time.
• CTake personal charge of the full investigation as the chief financial officer instructed, gather the evidence alone, and decide the appropriate disciplinary outcome for the supervisor.
• DConfront the supervisor with the evidence to obtain an explanation, and if the explanation is unconvincing, escalate the matter to the chief financial officer and close the engagement.

Why A is correct: The auditor's role is to report red flags to the right party without presuming fraud and to support, not lead, the investigation; escalating beyond a manager seeking silence protects both the response and the auditor's independence.

Why B is wrong: Treating strong fraud indicators as a routine observation dangerously delays escalation; a suspected ongoing fraud needs prompt reporting to the appropriate party, not deferral to a scheduled report.

Why C is wrong: Leading the investigation and deciding discipline looks decisive, but internal audit coordinates and supports investigations rather than owning them; taking charge unilaterally impairs objectivity and later assurance.

Why D is wrong: Early confrontation risks tipping off the suspect and losing evidence, and routing the matter only through the manager who wants it kept quiet fails to reach the parties who should oversee a suspected fraud.

An audit committee member at Corvale Retail asks whether every engagement should include a fraud investigation. Which response best reflects the internal auditor's obligation regarding fraud when planning engagements?

• AEvery engagement should include a fraud investigation, because fraud could theoretically arise in any process the team reviews.
• BThe auditor considers fraud potential when planning each engagement and expands into investigation only where the identified exposure justifies it.check_circle Correct
• CNo engagement need pay attention to fraud during planning, because responsibility for preventing fraud rests entirely with management.
• DThe auditor investigates fraud only in engagements over cash, since no other process carries any exposure worth planning around.

Why A is wrong: This is tempting because fraud can arise widely, but committing to investigate in every engagement misreads the duty; the auditor considers fraud potential and investigates only where indicators justify it.

Why B is correct: This captures the balance: fraud is weighed routinely during planning, but a full investigation is a conditional response reserved for engagements where the assessed exposure or indicators warrant it.

Why C is wrong: This is tempting because management does own prevention, but it wrongly frees the auditor from considering fraud potential in planning, which due professional care still requires.

Why D is wrong: This is tempting because cash is high-exposure, but procurement, payroll, and other processes also carry significant fraud exposure, so limiting attention to cash understates where fraud can occur.