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FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT Recognizing the Symptoms of Fraud CHAPTER 5.

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Presentation on theme: "FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT Recognizing the Symptoms of Fraud CHAPTER 5."— Presentation transcript:

1 FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT Recognizing the Symptoms of Fraud CHAPTER 5

2 Learning Objectives 1.Understand how symptoms help in the detection of fraud. 2.Recognize and understand accounting symptoms of fraud. 3.Identify internal controls that help detect fraud. 4.Identify and understand analytical symptoms of fraud.

3 Learning Objectives 5.Realize how lifestyle changes help detect fraud. 6.See how behavioral symptoms help detect fraud. 7.Recognize the importance of tips and complaints as fraud symptoms.

4 Discuss the Symptoms of Fraud.

5 List 6 Symptoms of Fraud. Accounting Anomalies - Ledger Doesn’t Balance Internal Control Weakness - No Vacation Analytical Anomalies 1 = 1

6 List 6 Symptoms of Fraud Tips & Complaints Unusual Behavior Extravagant Lifestyle

7 List Irregularities to Look for in Source Documents?  Missing Documents  “Stale Items” on Bank Reconciliation  Excessive Voids or Credits  Payee Names & Addresses = Customer Names & Addresses  Photocopied Documents  Payee Names & Addresses = Employee Names & Addresses  Past Due A/R  Reconciling Items  Altered Documents  Duplicate Payments  Second Endorsements on Checks

8 Accounting Anomalies  Faulty Journal Entries  Inaccuracies in the Ledgers –Ledger doesn’t balance –Master or Control Accounts do not equal the sum of individual customer or vendor accounts

9 Identify Symptoms of Journal Entry Fraud.  Journal entries without support documentation  Unexplained adjustments to receivables, payables, revenues or payables  Journal entries that do not balance  Journal entries made by individuals who would not normal make such entries  Journal entries made near the end of an accounting period

10 Discuss the Inaccuracies of Ledgers  Define a Ledger –A book of accounts  How do you prove the accuracy of a ledger? –A = L + OE or Dr = Cr  What symptoms relate to control accounts? –Dr = Cr –Master account balances do not equal sum of the subsidiary account balances

11 List & Explain 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

12 List Common Examples of Analytical Anomalies. Explain.  Unexplained Inventory Shortages or Adjustments  Deviations from Specifications  Increased Scrap  Excess Purchases  Too Many Debit or Credit Memos  Significant Increase or Decrease in Account Balances  Physical Anomalies  Cash Shortages or Overages  Excessive Late Charges  Unreasonable Expenses or Reimbursements

13 Revenues with Receivables Revenues with Inventory Discuss Questionable Financial Statement Relationships. Explain. Inventory with Payables Volume with Increase Cost Per Unit Volume with Scrap Inventory with Warehousing Costs Revenues with Cash Flows

14 Accounting Anomalies

15 Comment on Extravagant Lifestyles.  Financial Pressure  Greed  Spend What They Steal  Significant Improvement in Lifestyle  Flaunt Their “Wealth”  Living Way Beyond Their Legal Means

16 What is the Chain that Leads to Unusual Behavior? Guilt FearStress Behavior Changes

17 List Some Unusual Behaviors.  Insomnia  Increase Drinking  Drug Abuse  Unusually Irritable & Suspicious  Unable to Relax  Lack of Pleasure in Former Pleasing Things  Inability to Look People in the Eyes  Unusually Belligerent  Working Standing Up  Sweating  Increased Smoking  Fear of Getting Caught

18 Review the Fraud Triangle.

19 Tips & Complaints Term Match Theft Concealment Conversion Steps Taken by Perpetrator to Hide the Fraud Converting Stolen Assets to Cash & Spending the Cash Actually Taking Cash, Inventory, Information or Other Assets

20 Discuss Why More Frauds Are Discovered through Tips & Complaints?  Auditors Focus on Paperwork, Systems & Information  Fellow Employees Notice Lifestyle Changes  Complaints & Tips Are Only Symptoms - the Actual Investigation Can Show if a Fraud Exists

21 Why Do Employees Hesitate to Report Fraud Symptoms?  They’re Not 100% Sure a Fraud Is Occurring  They Don’t Want to Wrongly Accuse Someone  They Have Heard Horror Stories About What Happens to Whistle Blowers  Intimidation by Fraudsters  Condition Against Squealing

22 Discuss the Use of Hotlines.  Hotlines are “800” Phone Numbers Where Employees Can Provide Anonymous Tips & Information  Sometimes Set Up by the Company or Contracted with a Service or Organization Like ACFE  Run Hot & Cold

23 Match Terms Accounting Anomalies Internal Control Weakness Elements of Fraud Analytical Anomalies Weaknesses in control environment, accounting system or control activities Inaccuracies in journal entries, ledger, etc. Relationships, procedures or events don’t make sense Theft, Concealment, Conversion


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