Multiple Choice
Which method is commonly used to consider alternate ways of conducting business in order to manage risk, as related to the Fraud Triangle?
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6. Internal Controls and Reporting Cash
Fraud and the Fraud Triangle
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Which of the following represents an inherent risk for a financial institution according to the fraud triangle?
A
Strict internal controls
B
Employees experiencing financial pressure
C
Transparent financial reporting
D
Frequent external audits
Verified step by step guidance1
Understand the fraud triangle, which consists of three elements: opportunity, pressure (or incentive), and rationalization. These elements explain why individuals may commit fraud.
Identify the inherent risk for a financial institution. Inherent risk refers to the susceptibility of an account or transaction to misstatement due to fraud or error, without considering internal controls.
Evaluate each option provided in the question: Strict internal controls, Transparent financial reporting, Frequent external audits, and Employees experiencing financial pressure.
Recognize that 'Employees experiencing financial pressure' aligns with the 'pressure' element of the fraud triangle. Financial pressure can motivate employees to commit fraud, making it an inherent risk.
Conclude that the other options (strict internal controls, transparent financial reporting, and frequent external audits) are measures to mitigate fraud risk, not inherent risks themselves.
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