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Chapter 5

Computer Fraud
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Learning Objectives
 Explain the threats faced by modern information systems.
 Define fraud and describe the process one follows to
perpetuate a fraud.
 Discuss who perpetrates fraud and why it occurs,
 the pressures, opportunities, and rationalizations that are
present in most frauds.
 Define computer fraud and discuss the different computer
fraud classifications.
 Explain how to prevent and detect computer fraud and

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Common Threats to AIS
Natural Disasters and Terrorist Threats
Software Errors and/or Equipment
Unintentional Acts (Human Error)
Intentional Acts (Computer Crimes)

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What Is Fraud?
 Gaining an unfair advantage over another
 A false statement, representation, or disclosure
 A material fact that induces a person to act
 An intent to deceive
 A justifiable reliance on the fraudulent fact in which a
person takes action
 An injury or loss suffered by the victim

 Individuals who commit fraud are referred to as

white-collar criminals.

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Forms of Fraud
Misappropriation of assets
 Theft of a companies assets.
 Largest factors for theft of assets:
 Absence of internal control system
 Failure to enforce internal control system

Fraudulent financial reporting

 “…intentional or reckless conduct, whether
by act or omission, that results in materially
misleading financial statements” (The
Treadway Commission).

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Reasons for Fraudulent Financial Statements

1. Deceive investors or creditors

2. Increase a company’s stock price
3. Meet cash flow needs
4. Hide company losses or other problems

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Treadway Commission Actions to
Reduce Fraud
1. Establish environment which supports
the integrity of the financial reporting
2. Identification of factors that lead to
3. Assess the risk of fraud within the
4. Design and implement internal controls
to provide assurance that fraud is being
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SAS #99
 Auditors responsibility to detect fraud
 Understand fraud
 Discuss risks of material fraudulent statements
 Among members of audit team
 Obtain information
 Look for fraud risk factors
 Identify, assess, and respond to risk
 Evaluate the results of audit tests
 Determine impact of fraud on financial statements
 Document and communicate findings
 See Chapter 3
 Incorporate a technological focus

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The Fraud Triangle




Three conditions that are present

when Fraud occurs.

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Emotional Lifestyle
• Motivation or incentive to commit fraud
1.Employee Employee
• Financial
• Emotional
• Lifestyle Mgmt


• Industry conditions
• Management characteristicsReporting

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• Condition or situation that allows a person or organization

1.Commit the fraud Conceal

2.Conceal the fraud Convert

• Lapping
• Kiting
3.Convert the theft or misrepresentation Opportunity

to personal gain

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•Justification of illegal behavior

• I am not being dishonest.
2.Attitude Attitude

• I don’t need to be honest. Lack of

3.Lack of personal integrity Justification Integrity

• Theft is valued higher than honesty or

integrity. Rationalization

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Computer Fraud
Any illegal act in which knowledge
of computer technology is
necessary for:

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Rise of Computer Fraud
1. Definition is not agreed on

2. Many go undetected

3. High percentage is not reported

4. Lack of network security

5. Step-by-step guides are easily available

6. Law enforcement is overburdened

7. Difficulty calculating loss

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Computer Fraud Classifications
 Input Fraud
 Alteration or falsifying input

 Processor Fraud
 Unauthorized system use

 Computer Instructions Fraud

 Modifying software, illegal copying of software, using software in
an unauthorized manner, creating software to undergo
unauthorized activities

 Data Fraud
 Illegally using, copying, browsing, searching, or harming
company data

 Output Fraud
 Stealing, copying, or misusing computer printouts or displayed
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