1 FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT Recognizing the Symptoms of FraudCHAPTER 5
2 Learning ObjectivesUnderstand how symptoms help in the detection of fraud.Recognize and understand accounting symptoms of fraud.Identify internal controls that help detect fraud.Identify and understand analytical symptoms of fraud.
3 Learning Objectives Realize how lifestyle changes help detect fraud. See how behavioral symptoms help detect fraud.Recognize the importance of tips and complaints as fraud symptoms.
4 Discuss the Symptoms of Fraud. Red Flags = DangerSymptons = FraudEarly Detection Saved
5 List 6 Symptoms of Fraud. 1 = 1 Accounting Anomalies - Ledger Doesn’t BalanceAnalytical Anomalies1 = 1Internal Control Weakness - No Vacation
6 Extravagant Lifestyle List 6 Symptoms of FraudExtravagant LifestyleTips & ComplaintsUnusual Behavior
7 List Irregularities to Look for in Source Documents? Missing Documents“Stale Items” on Bank ReconciliationExcessive Voids or CreditsPayee Names & Addresses = Customer Names & AddressesPhotocopied DocumentsPayee Names & Addresses = Employee Names & AddressesPast Due A/RReconciling ItemsAltered DocumentsDuplicate PaymentsSecond Endorsements on Checks
8 Accounting Anomalies Faulty Journal Entries Inaccuracies in the LedgersLedger doesn’t balanceMaster 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 documentationUnexplained adjustments to receivables, payables, revenues or payablesJournal entries that do not balanceJournal entries made by individuals who would not normal make such entriesJournal entries made near the end of an accounting period
10 Discuss the Inaccuracies of Ledgers Define a LedgerA book of accountsHow do you prove the accuracy of a ledger?A = L + OE or Dr = CrWhat symptoms relate to control accounts?Dr = CrMaster account balances do not equal sum of the subsidiary account balances
11 List & Explain Internal Control Weaknesses. Lack of Segregation of DutiesLack of Physical SafeguardsLack of Independent Checks & ReviewsLack of Proper AuthorizationOverriding of Existing ControlsInadequate Accounting System
12 List Common Examples of Analytical Anomalies. Explain. Unexplained Inventory Shortages or AdjustmentsDeviations from SpecificationsIncreased ScrapExcess PurchasesToo Many Debit or Credit MemosSignificant Increase or Decrease in Account BalancesPhysical AnomaliesCash Shortages or OveragesExcessive Late ChargesUnreasonable Expenses or Reimbursements
13 Discuss Questionable Financial Statement Relationships. Explain. Revenues with InventoryRevenues with ReceivablesRevenues with Cash FlowsInventory with PayablesVolume with Increase Cost Per UnitVolume with ScrapInventory with Warehousing Costs
14 Learn to Observe Not Just See Accounting AnomaliesThings Look StrangePatterns Don't MatchLearn to Observe Not Just See
15 Comment on Extravagant Lifestyles. Financial PressureGreedSpend What They StealSignificant Improvement in LifestyleFlaunt Their “Wealth”Living Way Beyond Their Legal Means
16 What is the Chain that Leads to Unusual Behavior? GuiltFearStressBehaviorChanges
17 List Some Unusual Behaviors. InsomniaIncrease DrinkingDrug AbuseUnusually Irritable & SuspiciousUnable to RelaxLack of Pleasure in Former Pleasing ThingsInability to Look People in the EyesUnusually BelligerentWorking Standing UpSweatingIncreased SmokingFear of Getting Caught
19 Tips & Complaints Term Match Steps Taken byPerpetrator toHide the FraudTheftConverting StolenAssets to Cash &Spending the CashConcealmentActually TakingCash, Inventory,Information orOther AssetsConversion
20 Discuss Why More Frauds Are Discovered through Tips & Complaints? Auditors Focus on Paperwork, Systems & InformationFellow Employees Notice Lifestyle ChangesComplaints & 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 OccurringThey Don’t Want to Wrongly Accuse SomeoneThey Have Heard Horror Stories About What Happens to Whistle BlowersIntimidation by FraudstersCondition Against Squealing
22 Discuss the Use of Hotlines. Hotlines are “800” Phone Numbers Where Employees Can Provide Anonymous Tips & InformationSometimes Set Up by the Company or Contracted with a Service or Organization Like ACFERun Hot & Cold
23 Match Terms Accounting Anomalies Weaknesses in control environment, accounting system or control activitiesAnalytical AnomaliesTheft, Concealment, ConversionElements of FraudRelationships, procedures or events don’t make senseInternal Control WeaknessInaccuracies in journal entries, ledger, etc.