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