Fraud Examination

Fraud Examination

 

Resolving allegations of fraud is the discipline of fraud examination

-requires obtaining documentary evidence, interviews, witnesses, writing reports, testifying

 

Auditing versus fraud examination

Fraud examination is : nonrecurring, specific, place blame, adversarial, proof, follows methodology – see page 4

 

Fraud examination needs to be handled in a legal manner and resolved in a timely manner

 

Predication – totality of circumstances to suggest fraud occurred

 

Fraud Theory Approach:

Analyze available data

Create a Hypothesis

Test the hypothesis

Refine and amend the hypothesis

 

3 tools used in fraud examinations

  1. Skilled in examining financial statements
  2.  Interview process
  3. Observation

 

Occupational fraud – use of one’s occupation for personal enrichment through misuse/misapplication of organization’s resources

 

Four Elements to be counted as fraud

  1. Material false statement
  2. Knowing the statement was false when saying it
  3. Reliance of the false statement by a victim
  4.  Damages resulting from statement

 

Larceny = stealing

 

Embezzle- to take and convert to one’s own use

 

Abuse: use equipment belonging to an organization

Surfing the web at work

Personal business at work

Extended breaks

Leaving work early

 

 

 

 

 

 

Edwin H Sutherland- coined term “white collar crime” theory of differential association- crime is learned.

 

Donald Cressey: fraud triangle

Fraud Triangle is Opportunity, Pressure, Rationalization

Takes all 3 elements

 

Nonshareable problems

  1. violation of obligations
  2. problems stemming from personal failure
  3. business reversals
  4. physical isolation
  5. status gaining
  6. employer-employee relations

 

Common fraud committers

Independent businessmen- convert deposits entrusted to them

Long-term violators- small amounts over time

Absconders- take money and run

 

Steve Albrecht

Listed occupational red flags as stated on page 21 and 22

Developed fraud scale- page 23

 

Hollinger clark study

Theft based on workplace conditions

Cost of thefts understated

Motivations of theft were: non-shareable financial problems, newer generations are less honest, all employees can be tempted to steal, job dissatisfaction

Concern over finances affects theft

New employees have less commitment to organization

More access in job means more theft

Hating your job leads to it

Controls: company policy, personnel selection, inventory, security and punishment

 

Cost of fraud

$600 billion annually

6%

 

 

 

 

 

Fraud Tree states there are 3 categories of occupational fraud

  1. asset misappropriations : 85% of cases but least costly
  2. corruption –example is kickbacks
  3. fraudulent statements

44 has “essential terms”

 

Skimming

 

Skimming- theft of cash from entity before its entry into accounting system

Also known as off-books frauds

No direct audit trail

 

People who receive money are in position to skim

 

Asset misappropriations is divided into cash schemes and non-cash schemes

 

52 -55 has graphs

 

Skimming detection usually comes from tips from employees or by accident

 

 

Skimming is either sales or receivables

 

Sales Skimming

Employee collects money for a sale but keeps the money and makes no record of the transaction

 

Cash register manipulation

After hours sales

Skimming by off-site employees (example is independent salesmen)

Poor collection procedures

Understated sales (ring sale but for less than what was collected while keeping the difference)

Check for currency substitutions

Theft in the mail- room, incoming checks/cash

 

 

Preventing and detecting sales skimming

Maintain oversight on where cash enters organization

Video cameras

Incentives for reporting employee

Cluster cash registers

63

 

 

 

Receivables skimming

More difficult than sales skimming

Payments are expected

 

Lapping- crediting one account from another customers account

Force balancing- says the payment was recorded but it was not, creates shortage in cash

Stolen statements-

Fraudulent write-offs or discounts- write off as bad debt

Debiting wrong account-

Document destruction-

 

Preventing receivables

Supervisory approval for write offs

Trend analysis for overdue accounts

70 is audit tests for detection

72 has essential terms

 

 

 

 

Cash Larceny

 

Intentional taking away of an employer’s cash

Cash schemes can be broken into 2 groups

Fraudulent disbursement schemes

Cash receipt schemes

 

Detection methods

Internal audit

Accident

Internal control

 

Graphs on page78-81

 

Cash Larceny schemes

 

At the point of sale

From incoming receivables

From victim organization’s bank deposits

Theft from other registers

Death by a thousand cuts – slowly taking small amounts

Reversing transactions- false voids

Altering cash counts or register tapes

Destroying register tapes

 

 

Preventing

Count cash at end of day

 

Larceny of receivables

Force balancing

Reversing entries

Destruction of records

 

Cash larceny from the deposit

When taking money to the bank

Post missing money as deposits in transit

 

Deposit Lapping- steal deposits from one day and replace with deposit from day 2

Deposits in transit

 

Preventing-

incoming revenues should be delivered to centralized dpt

two copies of deposit slip

 

Audit tests to detect cash  larceny on   91

 

Billing Schemes

 

Billing schemes- scheme in which payment is submitted for fictitious goods or services, inflated services, or invoices for personal purchases

Most common

Graphs on page 98-101

 

3 categories

  1. shell company scheme

–          submitting false invoices

–          self approval of invoices

–          rubber stamp supervisor

–          reliance on false documents

–          collusion: working together to commit fraud

–          Purchase of services other than goods

–          Pass through schemes- shell company sells goods at mark up

Preventing Shell: verify vendor list, expenses exceed budget, verify company

  1. non-accomplice vendor- intentionally double pay vendor, cash second check. overbilling
  2. personal purchase

-false invoicing

-falsifying documents

-altering existing purchase orders

– false purchase requisition

– personal purchases on company credit cards

-charge accounts

-returning merchandise for cash

 

Audit Tests for detecting billing schemes on   119

 

Check Tampering

 

Check Tampering- converting of an organization’s funds by forging or altering a drawn check or stealing a check

Graphs on   128 -131

 

Five principal methods of check tampering

  1. forged maker schemes
  2. Forged endorsement schemes
  3. Altered payee schemes
  4. Concealed check schemes
  5. Authorized maker schemes

 

 

Person who signs a check is the “maker”

 

Whom is the check made payable to

Perpetrator

Accomplice

Cash

Vendors

 

Forging signatures

Free-hand forgery

Photocopy forgery

Automatic check signing instruments

 

Miscoding fraudulent

 

Converting the check

 

Forged Endorsement Schemes

–          Intercepting of a check and signs a third party name

Theft of returned check

Stolen during delivery

Poor control of signed checks

Rerouting the delivery of checks

 

Preventing and detecting

Vendor does not get paid

Limit who can change vendor accounts

Altered Payee Schemes

Inserting a new Payee

Tacking On: adding letters and words to a payee

Erasable ink

Blank Checks

Converting altered check

 

Concealed check schemes

–          Authorized approves a check without paying attention

 

Authorized Maker Scheme

Boss asks for blank check/Intimidation

Poor Controls

 

Concealing Check Tampering

Reconcile bank statement

Re-alteration of checks

Falsify disbursements journal

Reissue intercepted check

Fake supporting documents

155 is audit tests

 

Payroll Schemes

 

Payroll Scheme- based on fake payment claim

Stats/graphs on   164- 167

 

Payroll Schemes

  1. Ghost employee
  2. Falsified hours
  3. Commission schemes

 

Ghost employee

Enter ghost to payroll

-fail to remove name of fired employee from payroll

-fake name that is similar to real employee

Collecting Timekeeping information

-documentation or time card for fake employee

Issuing paycheck

Direct deposit

Check

Change delivery address

 

Preventing

Separate hiring and payroll duties

Look for employees that lack social security number

Falsified Hours and Salary

-Manually prepared timecards and lie about hours

— forge supervisor signature

–collusion with supervisor

–rubber stamp

–poor custody procedures (who maintains time cards)

-Time Clocks and Automated systems

–Friend punches absent person in

–changing pay rate in system

 

Commission schemes

–          Fake sales

–          Altered sales: change price listed on sales doc

  180 for audit test

 

Register Disbursement Schemes

 

Register Disbursement Schemes- removal of money from cash register

 

Graphs on   212-215

 

False Refunds and False Voids

 

False Refunds

-fictitious refunds

– overstate refunds: overstate refund amount and skim from the difference

-credit card refund: fraudster makes returns on his own credit card

 

False Voids:

Small disbursements

Destroy records

222 audit tests

 

 

 

Fraud Examination

Fraud Examination

 

Accounting fraud examinations and investigations can prevent the misstatements of financial reports and allow CPA Firms to better aid their clients.

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