Chapter 12:

Fraud Schemes & Fraud Detection

IT Auditing & Assurance, 2e, Hall & Singleton Singleton

IT Auditing & Assurance, 2e, Hall &

FRAUD TREE
Asset misappropriation 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

Financial fraud
1. 2. 3. 4. 5.

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 Often escapes detection until irreparable harm has been done Usually, perpetrator is executive management

Corruption fraud
1.

Bribery, etc.
IT Auditing & Assurance, 2e, Hall & Singleton

ACFE 2004 REPORT TO THE NATION

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FRAUD SCHEMES
Fraudulent financial statements {5%}

Corruption {13%}

Bribery Illegal gratuities Conflicts of interest Economic extortion Charges to expense accounts Lapping Kiting Transaction fraud
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Asset misappropriation {85%}

Percentages per ACFE 2002 Report to the Nation see Table 12-1

COMPUTER FRAUD SCHEMES

Data Collection
Data Processing

Database Management
Information Generation

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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
IT Auditing & Assurance, 2e, Hall & Singleton

FRAUDULANT FINANCIAL REPORTING

Risk factors:
1. Managements characteristics and influence over the control environment

2. Industry conditions
3. Operating characteristics and financial stability

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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
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MISAPPROPRIATION OF ASSETS
Risk factors:
1. Susceptibility of assets to

misappropriation
2. Controls

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MISAPPROPRIATION OF ASSETS
Common schemes:
Personal purchases Ghost employees Fictitious expenses Altered payee Pass-through vendors Theft of cash (or inventory) Lapping

IT Auditing & Assurance, 2e, Hall & Singleton

ACFE 2004 REPORT TO THE NATION

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AUDITORS RESPONSE TO RISK ASSESSMENT

Engagement staffing and extent of supervision
Professional skepticism

Nature, timing, extent of procedures performed

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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
IT Auditing & Assurance, 2e, Hall & Singleton

AUDITORS DOCUMENTATION
Document in the working papers criteria used for assessing fraud risk factors: 1. Those risk factors identified 2. Auditors response to them

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FRAUD DETECTION TECHNIQUES USING ACL

Payments to fictitious vendors
Sequential invoice numbers Vendors with P.O. boxes Vendors with employee address Multiple company with same address Invoice amounts slightly below review threshold

IT Auditing & Assurance, 2e, Hall & Singleton

FRAUD DETECTION TECHNIQUES USING ACL

Payroll fraud
Test for excessive hours worked Test for duplicate payments Tests for non-existent employee

IT Auditing & Assurance, 2e, Hall & Singleton

FRAUD DETECTION TECHNIQUES USING ACL

Lapping A.R.
Balance forward method Open invoice method

IT Auditing & Assurance, 2e, Hall & Singleton

Chapter 12:
Fraud Schemes & Fraud Detection

IT Auditing & Assurance, 2e, Hall & Singleton Singleton

IT Auditing & Assurance, 2e, Hall &