Accounting Frauds

Proactive Fraud Auditing
End of Chapter 4 in Albrecht

FRAUD DETECTION
Recognizing the Symptoms of Fraud

Identify Risk Exposures

Proactively Look for Symptoms & Exposures

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Identify Fraud Symptoms for Each Exposure

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Investigate Identified Symptoms

Symptoms of Fraud

What are some irregularities in source documents to look for?
 Missing Documents  Payee Names & Addresses = Employee  “Stale Items” on Bank Items”
Reconciliation  Excessive Voids or Credits  Payee Names & Addresses = Customer Names & Addresses  Photocopied Documents Names & Addresses

Red Flag = Danger But… a symptom = FRAUD

 Past Due A/R increasing  Reconciling Items    increasing Altered Documents Duplicate Payments Second Endorsements on Checks

Early Detection = $ Saved

Accounting Anomalies

Accounting Anomalies
 Faulty Journal Entries  Inaccuracies in the Ledgers
 Ledger Doesn’t Balance Doesn’  Master or Control Accounts Do Not Equal the Sum of Individual Customer or Vendor Accounts

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Recognize Internal Control Weaknesses
Lack of Segregation of Duties Lack of Physical Safeguards Lack of Independent Checks & Reviews Lack of Proper Authorization Overriding of Existing Controls Inadequate Accounting System

Common Examples of Analytical Anomalies
 Unexplained Inventory  Significant increase or
Shortages or Adjustments decrease in account balances

 Deviations from
Specifications

 Physical Anomalies  Cash Shortages or
Overages

 Increased Scrap  Excess Purchases  Too Many Debit or
Credit Memos

 Excessive Late Charges  Unreasonable Expenses or Reimbursements

Strange Financial Statement Relationships
Revenues with Inventory Receivables Cash Flows Payables Cost Per Unit Revenues with Revenues with Inventory with Volume with

Financial Statement Fraud
A Preview

Volume with Scrap Inventory with Warehousing Costs

Strange Financial Statement Relationships
 One change in one account, taken in