L3 Notes_Part_3 - U[E(Net Gain)] = Greed, hyper...

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Perceived Economic Incentives to Commit Fraud Committing Cognitive Relieving U( fraud ) = U[E(Net Gain)] – U[Dissonance] + U [Pressure ] E(Net financial gain) = E(Gain) – E(Penalty) E(Gain) = p * Economic Gain E(Penalty) = (1-p) * [(q|1-p) * Q + (r|1-p)* R + (s|1-p) *S] Where p = the perceived probability of successfully concealing the fraud (Opportunity) Where 1-p = the perceived probability of getting caught (q|1-p) = the probability of being prosecuted (r|1-p) = the probability of being fired but not prosecuted (s|1-p) = the probability of being slapped on the wrist Q, R, and S are consequences where Q > R > S -Financial consequences include legal costs, damage award, loss of future wages and decreased wages elsewhere, potential cost of moving
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© W.R. Knechel The Utility of Committing Fraud All Incentives: Committing Cognitive Relieving U( fraud ) = U[E(Net Gain)] – U[Dissonance] + U [Pressure ]
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Unformatted text preview: U[E(Net Gain)] = Greed, hyper materialism, living beyond ones means, unexpected financial needs, poor credit, personal financial losses, risk taking, pride of hacking the system U (Cognitive dissonance) = the psychological cost of sacrificing integrity, ethics, loyalty to company, loyalty to co-workers and lying publicly, promotion perceived as deserved failed to come through U(Relieving pressure) = Childrens health, spouses demands, hidden vices, financial pressures (e.g., bankruptcy involves losing house and uprooting kids, ones business will fail and with it, control over destiny Four Phases of an Audit Plan and design audit approach Perform tests of controls and substantive tests of transactions Perform analytical procedures and tests of details of balances Complete the audit and issue an audit report PHASE 1 PHASE 2 PHASE 3 PHASE 4 Arens, Elder Beasley...
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L3 Notes_Part_3 - U[E(Net Gain)] = Greed, hyper...

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