Problem:
Please use fraud item below to respond.
Which of the following internal controls would likely be most effective in helping to prevent fraud?
a. Hidden surveillance cameras
b. Secret cash counts
c. Covert email monitoring
d. Fake surveillance cameras
I selected (b) secret cash counts but it was incorrect. The correct answer is (d).
According to the article answer (d) Fake Surveillance Cameras: Perhaps the most effective way to prevent a fraudulent act is to increase in the perpetrator's mind the perception that he or she will be caught. Consequently, the mere presence of a perceived detection method—even a non-functioning one, such as fake surveillance cameras—can deter a potential fraudster from following through with a scheme.
Although fully functioning security cameras are certainly the more effective option, organizations lacking the resources to collect and review security footage might consider installing a fake surveillance camera as a deterrent. In contrast, controls that are unseen—for example, hidden surveillance cameras, secret cash counts and covert email monitoring—might increase the likelihood of fraud detection, but they will do little to prevent the fraud from occurring in the first place.
How is this item relevant to the audit of financial statements of a closely-held company? What would be the impact on the audit opinion if the auditor did NOT uncover the fraud? Would this particular item be easily discovered by the auditor in the normal course of their audit? Why or why not?