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Which of the following is a way by which risk can be diversified?
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6. Internal Controls and Reporting Cash
Fraud and the Fraud Triangle
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What is the primary reason that many new businesses fail early on, according to the Fraud Triangle framework?
A
High employee turnover
B
Overinvestment in marketing
C
Lack of sufficient internal controls, increasing the opportunity for fraud
D
Excessive government regulation
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Understand the Fraud Triangle framework, which consists of three elements: Opportunity, Pressure, and Rationalization. These elements explain why individuals commit fraud.
Focus on the 'Opportunity' element of the Fraud Triangle. Opportunity arises when there are weaknesses in internal controls, allowing individuals to exploit the system.
Recognize that new businesses often lack sufficient internal controls due to limited resources, lack of experience, or inadequate systems, which increases the opportunity for fraud.
Compare the given options to identify which one aligns with the 'Opportunity' element of the Fraud Triangle. The correct answer is 'Lack of sufficient internal controls, increasing the opportunity for fraud.'
Conclude that the primary reason many new businesses fail early on, according to the Fraud Triangle framework, is the lack of sufficient internal controls, which creates an environment conducive to fraud.
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