CIA EXAM PART 1 STUDY GUIDE - FRAUD RISKS.FINAL TEST
2026\2027.
Define Fraud Risk
Fraud risk is the probability that fraud will occur and the potential consequences to the organization when
it occurs.
The IPPF glossary defines fraud as:
Any illegal act characterized by deceit, concealment, or violation of trust. These acts are not dependent
upon the application of threat of violence or of physical force. Frauds are perpetrated by parties and
organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure
personal or business advantage.
What is the fraud triangle?
The fraud triangle is a set of three conditions that, if present in the right proportions, suggest the
possibility of fraud: opportunity, motive, and rationalization.
Opportunity can be described as...
A process may be designed properly for typical conditions. However, a window of opportunity may arise
for something to go wrong or that creates circumstances for the control to fail.
- An opportunity for fraud may exist due to poor control design or lack of controls. For example, a system
can be developed that appears to protect assets but missing an important control. Anyone aware of the
gap may be able to take advantage of it without much effort.
- Persons in positions of authority can create opportunities to override existing controls (i.e.,
management override) because subordinates or weak controls allow them to circumvent the rules.
Motive (also called incentive or pressure) can be described as...
While people can rationalize their acts, there needs to be an incentive that entices them to behave that
way.
- A key motivator is the gratification of a desire, such as greed, or an addiction.
- Power is a great motivator. Power can be career-related or simply gaining esteem in the eyes of family
or coworkers. For instance, some computer frauds are done just to show that the hacker has the power
to do it.
- A third motivator is pressure, from either unrealistic job requirements, physical stresses, or outside
parties.
Rationalization can be described as...
Fraud perpetrators must be able to justify their actions to themselves as a psychological coping
mechanism, allowing them to believe that they have done nothing wrong and are "normal people." For
example, these individuals might consider that they were entitled to the stolen item or that if executives
,CIA EXAM PART 1 STUDY GUIDE - FRAUD RISKS.FINAL TEST
2026\2027.
break the rules, it must be right for others to do so as well.
- Some people will do things that are defined as unacceptable behavior by the organization yet are
commonplace in their culture (e.g., bribery) or were accepted by previous employers. As a result, these
individuals will not comply with rules that don't make sense to them.
- Some people may have periods of financial difficulty in their lives, have succumbed to a costly addiction,
or are facing other pressures. Consequently, they will rationalize that they are just borrowing the money
and, when their lives improve, they will pay it back.
- Others may feel that stealing from a company is not bad, thereby depersonalizing the act.
Red flags are...
signs that indicate both the adequacy of controls in place to deter fraud and the possibility that some
perpetrator has overcome weak or absent controls to commit fraud. Fraud red flags may surface at any
stage of the internal audit. Red flags are only warning signs; they are not proof that fraud has been
committed.
Red flags may relate to time, frequency, place, amount, or personality. They include items such as:
- Overrides of controls by management or offices
- Lack of separation of duties
- Irregular or poorly explained management activities.
- Constantly exceeding goals/objectives regardless of business conditions or competition.
- Too many nonroutine transactions or journal entries.
- Problems or delays in providing requested information
- Significant or unusual changes in customers or suppliers
- Transactions that lack documentation or normal approval
- Employees or management hand-delivering checks.
- Customer complaints about delivery
- Employees exhibiting significant behavioral changes
- Poor IT access controls.
What are some examples of macro-level red flags?
- Stiff competition, unfair trade practices, or economic downturns that create pressure to perform or
lead to layoffs that place economic pressures on individuals. These conditions may generate the motive to
commit fraud.
- Recently deregulated or poorly regulated industries in which absence or laxity of controls creates
opportunity for fraud, for example, the ease of accessing cash in the business or the complexity and
opacity of transactions.
- An industry or cultural trend toward dishonesty and disregard of law and regulation (e.g., a history of
, CIA EXAM PART 1 STUDY GUIDE - FRAUD RISKS.FINAL TEST
2026\2027.
corrupt practices by certain types of government contractors, a pattern of bribe taking by government
officials). Perpetrators may point to a history or climate of acceptance as rationalization for fraud.
What are some examples of red flags on the micro or organizational level?
- Financial motive from the loss of a lucrative contract, the pressure to improve financial performance to
obtain a loan or before issuing stock, or a research and development failure that threatens the
organization's product pipeline.
- Reorganizations that disrupt control policies and create fraud opportunity. Failure to screen may lead to
hiring with the motive to commit fraud (e.g., hiring supervisors who fail to implement, enforce, and
monitor control policies).
- Failure to train all personnel in the organization's ethical code. This can contribute to a culture that
easily rationalizes small and large acts of fraud, including theft, bid rigging, kickbacks, and conflicts of
interest.
What two types of micro environments in particular offer special opportunities for fraud and
challenges for internal auditing?
International organizations and organizations that rely heavily on technology.
* What four industries alone account for more than 70% of white-collar fraud?
Financial Services, insurance, manufacturing, and energy.
People committing fraud often display certain behaviors or characteristics that may serve as
warning signs or red flags. Personal red flags include:
- Living beyond one's means
- Conveying dissatisfaction with the job to fellow employees
- Unusually close association with suppliers
- Severe personal financial losses
- Addiction to drugs, alcohol, or gambling
- Change in personal circumstances
- Developing outside business interests
COSO's Internal Control—Integrated Framework has 5 components. For the control environment,
principle 1...
relates to establishing and communicating a fraud risk management program demonstrating the
expectations of the board and senior management regarding their integrity and ethics related to
managing fraud risk.
COSO's Internal Control—Integrated Framework has 5 components. For risk assesment, principle
2...
is about performing comprehensive fraud risk assessments to identify fraud schemes and risks, assess
likelihood and impact, and assess existing fraud controls, addressing gaps and residual risk.
2026\2027.
Define Fraud Risk
Fraud risk is the probability that fraud will occur and the potential consequences to the organization when
it occurs.
The IPPF glossary defines fraud as:
Any illegal act characterized by deceit, concealment, or violation of trust. These acts are not dependent
upon the application of threat of violence or of physical force. Frauds are perpetrated by parties and
organizations to obtain money, property, or services; to avoid payment or loss of services; or to secure
personal or business advantage.
What is the fraud triangle?
The fraud triangle is a set of three conditions that, if present in the right proportions, suggest the
possibility of fraud: opportunity, motive, and rationalization.
Opportunity can be described as...
A process may be designed properly for typical conditions. However, a window of opportunity may arise
for something to go wrong or that creates circumstances for the control to fail.
- An opportunity for fraud may exist due to poor control design or lack of controls. For example, a system
can be developed that appears to protect assets but missing an important control. Anyone aware of the
gap may be able to take advantage of it without much effort.
- Persons in positions of authority can create opportunities to override existing controls (i.e.,
management override) because subordinates or weak controls allow them to circumvent the rules.
Motive (also called incentive or pressure) can be described as...
While people can rationalize their acts, there needs to be an incentive that entices them to behave that
way.
- A key motivator is the gratification of a desire, such as greed, or an addiction.
- Power is a great motivator. Power can be career-related or simply gaining esteem in the eyes of family
or coworkers. For instance, some computer frauds are done just to show that the hacker has the power
to do it.
- A third motivator is pressure, from either unrealistic job requirements, physical stresses, or outside
parties.
Rationalization can be described as...
Fraud perpetrators must be able to justify their actions to themselves as a psychological coping
mechanism, allowing them to believe that they have done nothing wrong and are "normal people." For
example, these individuals might consider that they were entitled to the stolen item or that if executives
,CIA EXAM PART 1 STUDY GUIDE - FRAUD RISKS.FINAL TEST
2026\2027.
break the rules, it must be right for others to do so as well.
- Some people will do things that are defined as unacceptable behavior by the organization yet are
commonplace in their culture (e.g., bribery) or were accepted by previous employers. As a result, these
individuals will not comply with rules that don't make sense to them.
- Some people may have periods of financial difficulty in their lives, have succumbed to a costly addiction,
or are facing other pressures. Consequently, they will rationalize that they are just borrowing the money
and, when their lives improve, they will pay it back.
- Others may feel that stealing from a company is not bad, thereby depersonalizing the act.
Red flags are...
signs that indicate both the adequacy of controls in place to deter fraud and the possibility that some
perpetrator has overcome weak or absent controls to commit fraud. Fraud red flags may surface at any
stage of the internal audit. Red flags are only warning signs; they are not proof that fraud has been
committed.
Red flags may relate to time, frequency, place, amount, or personality. They include items such as:
- Overrides of controls by management or offices
- Lack of separation of duties
- Irregular or poorly explained management activities.
- Constantly exceeding goals/objectives regardless of business conditions or competition.
- Too many nonroutine transactions or journal entries.
- Problems or delays in providing requested information
- Significant or unusual changes in customers or suppliers
- Transactions that lack documentation or normal approval
- Employees or management hand-delivering checks.
- Customer complaints about delivery
- Employees exhibiting significant behavioral changes
- Poor IT access controls.
What are some examples of macro-level red flags?
- Stiff competition, unfair trade practices, or economic downturns that create pressure to perform or
lead to layoffs that place economic pressures on individuals. These conditions may generate the motive to
commit fraud.
- Recently deregulated or poorly regulated industries in which absence or laxity of controls creates
opportunity for fraud, for example, the ease of accessing cash in the business or the complexity and
opacity of transactions.
- An industry or cultural trend toward dishonesty and disregard of law and regulation (e.g., a history of
, CIA EXAM PART 1 STUDY GUIDE - FRAUD RISKS.FINAL TEST
2026\2027.
corrupt practices by certain types of government contractors, a pattern of bribe taking by government
officials). Perpetrators may point to a history or climate of acceptance as rationalization for fraud.
What are some examples of red flags on the micro or organizational level?
- Financial motive from the loss of a lucrative contract, the pressure to improve financial performance to
obtain a loan or before issuing stock, or a research and development failure that threatens the
organization's product pipeline.
- Reorganizations that disrupt control policies and create fraud opportunity. Failure to screen may lead to
hiring with the motive to commit fraud (e.g., hiring supervisors who fail to implement, enforce, and
monitor control policies).
- Failure to train all personnel in the organization's ethical code. This can contribute to a culture that
easily rationalizes small and large acts of fraud, including theft, bid rigging, kickbacks, and conflicts of
interest.
What two types of micro environments in particular offer special opportunities for fraud and
challenges for internal auditing?
International organizations and organizations that rely heavily on technology.
* What four industries alone account for more than 70% of white-collar fraud?
Financial Services, insurance, manufacturing, and energy.
People committing fraud often display certain behaviors or characteristics that may serve as
warning signs or red flags. Personal red flags include:
- Living beyond one's means
- Conveying dissatisfaction with the job to fellow employees
- Unusually close association with suppliers
- Severe personal financial losses
- Addiction to drugs, alcohol, or gambling
- Change in personal circumstances
- Developing outside business interests
COSO's Internal Control—Integrated Framework has 5 components. For the control environment,
principle 1...
relates to establishing and communicating a fraud risk management program demonstrating the
expectations of the board and senior management regarding their integrity and ethics related to
managing fraud risk.
COSO's Internal Control—Integrated Framework has 5 components. For risk assesment, principle
2...
is about performing comprehensive fraud risk assessments to identify fraud schemes and risks, assess
likelihood and impact, and assess existing fraud controls, addressing gaps and residual risk.
