1. Learning Objectives LO1 Differentiate among frauds, errors, and illegal acts that might occur in an organization. LO2 Explain the auditing standards related to external, internal, and governmental auditors’ responsibilities to detect and report frauds, errors, and illegal acts. LO3 Outline some of the conditions that lead to frauds. LO4 Explain the audit procedures for detecting common employee fraud schemes. LO5 Explain the audit procedures for detecting common fraudulent financial reporting. LO6 Describe documents that auditors use for fraud risk assessment and detection. 1

2. Fraud Detection  Many frauds are investigated through noticing the signs and signals and then following the trail of missing, mutilated, or false documents that are part of the accounting records cover- up. LO4 2

3. Red Flags Observation of persons’ habits and lifestyle as well as changes in these may reveal some red flags. Fraudsters frequently exhibit these characteristics:  defensive,  argumentative, and blame-shifting behaviours;  tiredness;  agitation;  inability to make eye contact;  irritability;  and excessive sweating. LO4 3

4. Red Flags Telltale hints of a cover-up often appear in the accounting records. The key is to notice exceptions and oddities, such as  transactions that are at odd times of the day, month, or season;  too many or too few of them;  in the wrong branch location;  and in amounts too high, too low, too consistent, or too inconsistent. LO4 4

5. Internal Control and Fraud Detection  40% of all frauds are detected through tips from employees.  Almost 30% of frauds were detected by internal audit.  18% by other internal controls.  21% by accident, and  11% by external auditors. LO4 5