Chapter 5: Computer Fraud
Common Threats to AIS
• Natural Disasters and Terrorist Threats
• Software Errors and/or Equipment Malfunction
• Unintentional Acts (Human Error)
• Intentional Acts (Computer Crimes)
What Is Fraud?
• Gaining an unfair advantage over another person
o A false statement, representation, or disclosure
o A material fact that induces a person to act
o An intent to deceive
o A justifiable reliance on the fraudulent fact in which a person takes action
o An injury or loss suffered by the victim
• Individuals who commit fraud are referred to as white-collar criminals.
Forms of Fraud
• Misappropriation of assets
o Theft of a companies assets.
o Largest factors for theft of assets:
Absence of internal control system
Failure to enforce internal control system
• Fraudulent financial reporting
o “…intentional or reckless conduct, whether by act or omission, that results in
materially misleading financial statements” (The Treadway Commission).
Reasons for Fraudulent Financial Statements
• Deceive investors or creditors
• Increase a company’s stock price • Meet cash flow needs
• Hide company losses or other problems
Treadway Commission Actions to Reduce Fraud
• Establish environment which supports the integrity of the financial reporting process.
• Identification of factors that lead to fraud.
• Assess the risk of fraud within the company.
• Design and implement internal controls to provide assurance that fraud is being
• Auditors responsibility to detect fraud
o Understand fraud
o Discuss risks of material fraudulent statements
Among members of audit team
o Obtain information
Look for fraud risk factors
o Identify, assess, and respond to risk
o Evaluate the results of audit tests
Determine impact of fraud on financial statements
o Document and communicate findings
See Chapter 3
o Incorporate a technological focus
The Fraud Triangle
o Work, family.
• Opportunity o No control to catch them