1. Fraud Examination, 3E Chapter 5: Recognizing Symptoms of Fraud COPYRIGHT © 2009 South-Western, a part of Cengage Learning

2. Learning Objectives Understand how symptoms help in the detection of fraud. Identify and understand accounting symptoms of fraud. Describe internal controls that help detect fraud. Identify and understand analytical symptoms of fraud. 2

3. Learning Objectives Explain how lifestyle changes help detect fraud. Discuss how behavioral symptoms help detect fraud. Recognize the importance of tips and complaints as fraud symptoms. 3

4. Symptoms of Fraud Can be separated into six groups: 1.Accounting anomalies 2.Internal control weaknesses 3.Analytical anomalies 4.Extravagant lifestyle 5.Unusual behavior 6.Tips and complaints 4

5. Accounting Anomalies Common anomaly frauds involve: Irregularities in source documents Faulty journal entries Inaccuracies in ledgers 5

6. Internal Control Weaknesses Internal control fraud symptoms include : Lack of segregation of duties Lack of physical safeguards Lack of independent checks Lack of proper authorization Lack of proper documents and records Overriding of existing controls Inadequate accounting system 6

7. Analytical Fraud Symptoms Analytical Fraud symptoms include: Unexplained inventory shortages or adjustments Deviations from specifications Increased scrap Excess purchases Too many debit or credit memos Significant increases or decreases in account balances, ratios, or relationships *See the book for more 7

8. Extravagant Lifestyles Example Kay… Embezzled $3 million from her employer Bought a $500,000 or more home Bought five luxury cars Filled home with artwork and glass Bought a boat Paid cash to have yard landscaped Served lobster flown in from the east coast 8

9. Unusual Behaviors 9 Guilt Fear Stress Behavior Changes Insomnia Increased drinking Taking drugs Unusual irritability and suspiciousness Inability to relax Lack of pleasure in things usually enjoyed Fear of getting caught Inability to look people in the eyes Showing embarrassment around friends, co-workers, and family Defensiveness or argumentativeness Unusual belligerence in stating opinions Confessing (either to a religious leader, psychologist, or other professional) Obsessively contemplating possible consequences Working standing up Sweating Increased smoking Insomnia Increased drinking Taking drugs Unusual irritability and suspiciousness Inability to relax Lack of pleasure in things usually enjoyed Fear of getting caught Inability to look people in the eyes Showing embarrassment around friends, co-workers, and family Defensiveness or argumentativeness Unusual belligerence in stating opinions Confessing (either to a religious leader, psychologist, or other professional) Obsessively contemplating possible consequences Working standing up Sweating Increased smoking

10. Tips and Complaints 10 Theft Act Concealment Conversion The Fraud Element Triangle Who is in the best position to recognize fraud in each of these elements—Auditors or Company Employees? Company Employees