Fraud Schemes &
Fraud Detection
FRAUD
Asset misappropriation fraud
1.
2.
3.
4.
Financial fraud
1.
2.
3.
4.
Stealing something of value usually cash or inventory (i.e.,
asset theft)
Converting asset to usable form
Concealing the crime to avoid detection
Usually, perpetrator is an employee
Does not involve direct theft of assets
Often objective is to obtain higher stock price (i.e., financial fraud)
Typically involves misstating financial data to gain additional
compensation, promotion, or escape penalty for poor
performance
Usually, perpetrator is executive management
Corruption fraud
1.
Bribery, etc.
FRAUD
Cash larceny is the theft of cash that has already been
accounted for in the organization's books. Stealing cash
from the register. Writing personal checks to cover the
theft of cash. (after cash recorded).
Skimming is slang for taking cash "off the top" of the daily
receipts of a business (or from any cash transaction
involving a third interested party) and officially reporting a
lower total. (before cash recorded).
ACFE (Assoc of Certified Fraud Examiners)
2004 REPORT TO THE NATION
ACFE 2004 REPORT TO THE NATION
FRAUD SCHEMES
Fraudulent financial statements {5%}
Corruption {13%}
Bribery
Illegal gratuities (tips/money/gift)
Conflicts of interest
Asset misappropriation {85%}
Charges to expense accounts
Lapping (diverting a payment from one customer,
and then hides the theft by diverting cash from
another customer to offset the receivable from the
first customer)
Transaction fraud
Percentages per ACFE 2002 Report to the Nation
COMPUTER FRAUD SCHEMES
Data Collection
Data Processing
Database Management
Information Generation
AUDITORS RESPONSIBILITY FOR
DETECTING FRAUDSAS NO. 99
Sarbanes-Oxley Act 2002
SAS No. 99 Consideration of Fraud in a
Financial Statement Audit
1. Description and characteristics of fraud
2. Professional skepticism
3. Engagement personnel discussion
4. Obtaining audit evidence and information
5. Identifying risks
6. Assessing the identified risks
7. Responding to the assessment
8. Evaluating audit evidence and information
9. Communicating possible fraud
10. Documenting consideration of fraud
FRAUDULANT FINANCIAL
REPORTING
Risk factors:
1. Managements characteristics and
influence over the control environment
2. Industry conditions
3. Operating characteristics and financial
stability
FRAUDULANT FINANCIAL
REPORTING
Common schemes:
Improper revenue recognition
Improper treatment of sales
Improper asset valuation
Improper deferral of costs and
expenses
Improper recording of liabilities
Inadequate disclosures
What Is Internal Control?
Control Environment
Risk Assessment
Control activities
Information /
Communication
Monitoring
Sets the tone of an
organization.
Influences control
consciousness
Foundation for all other
components
Provides discipline and
structure
Why Did It Take So Long to Find
Out?
What Is Internal Control?
Control Environment
Risk Assessment
Identification and
analysis
Control activities
Relevant risks to
objective achievement
Information /
Communication
Forms basis of risk
management
Monitoring
What Is Internal Control?
Control Environment
Risk Assessment
Policies and procedures
Control activities
Help ensure
achievement of
management objectives
Information /
Communication
Monitoring
What Is Internal Control?
Control Environment
Risk Assessment
Information
identification, capture,
and exchange
Control activities
Forms and time frames
Information /
Communication
Enables people to carry
out responsibilities
Monitoring
Risk Factors
Misappropriation of Assets
Lack of management oversight
Inadequate job applicant
screening
Poor recordkeeping
Poor segregation of duties or
independent checks
Risk Factors
Misappropriation of Assets
Inappropriate transaction
authorization and approval
Poor physical safeguards
Lack of timely and appropriate
transaction documentation
No mandatory vacations for control
function employees
Risk Factors
Susceptibility of Assets to Misappropriation
Large amounts of cash on hand or in process.
Risk Factors
Susceptibility of Assets to Misappropriation
Inventory that is small in size, high in value, or in high demand.
Risk Factors
Susceptibility of Assets to Misappropriation
Easily convertible assets
Risk Factors
Susceptibility of Assets to Misappropriation
Fixed assets that are small, marketable, or lack
ownership identification.
Risk Factors
Material Misstatements Due to Fraud
Transactions improperly recorded or not recorded
completely / timely.
Unsupported/unauthorized balances or transactions.
Last-minute adjustments significantly affecting financial
results.
Risk Factors
Conflicting or Missing Evidential Matter
Missing documents or photocopies where originals should be.
Missing significant inventory or physical assets.
Risk Factors
Conflicting or Missing Evidential Matter
Unusual discrepancies between records and
confirmation replies.
Significant unexplained items on reconciliations.
Risk Factors
Conflicting or Missing Evidential Matter
Inconsistent, vague/unclear, or
implausible/unbelievabe responses to inquiries
or analytical procedures.
MISAPPROPRIATION OF ASSETS
Common schemes:
Personal purchases
Ghost employees
Fictitious expenses
Altered payee
Pass-through vendors (purchasing via shell /
fake company with higher price)
Theft of cash (or inventory)
Lapping
AUDITORS RESPONSE TO RISK
ASSESSMENT
Engagement staffing and extent of
supervision
Professional skepticism
Nature, timing, extent of procedures
performed
AUDITORS RESPONSE TO DETECTED
MISSTATEMENTS DUE TO FRAUD
If no material effect:
Refer matter to appropriate level of management
Ensure implications to other aspects of the audit
have been adequately addressed
If effect is material or undeterminable:
Consider implications for other aspects of the audit
Discuss the matter with senior management and
audit committee
Attempt to determine if material effect
Suggest client consult with legal counsel
AUDITORS DOCUMENTATION
Document in the working papers
criteria used for assessing fraud risk
factors:
1.
Those risk factors identified
2.
Auditors response to them
FRAUD DETECTION TECHNIQUES
USING ACL
Payments to fictitious vendors
Sequential invoice numbers
Vendors with P.O.
Vendors with employee address
Multiple company with same address
Invoice amounts slightly below review
threshold
FRAUD DETECTION TECHNIQUES
USING ACL
Payroll fraud
Test for excessive hours worked
Test for duplicate payments
Tests for non-existent employee
