1. 2019/8/2
Topic 13 : Frauds
2019/8/2
Week 1

2. Errors, Irregularities And Frauds
2019/8/2
Errors, Irregularities And Frauds
Errors : Careless and unintentional
Mistakes, misstatements, omissions or non-disclosures
Irregularities : Carefully-executed and intentional
Use of deception to obtain financial advantages
Resulting in misleading financial communications
Frauds : Synonymous with irregularities
In particular, involving criminal deception
Typical examples of management frauds and employee frauds
2019/8/2
Week 1

3. Management Frauds Versus Employee Frauds
2019/8/2
Management Frauds Versus Employee Frauds
Impact of management frauds : Usually more far reaching for four reasons
Reason One : Authority over resource utilization and money transfer => substantial amount
Reason Two : Authority to override procedures => difficult to detect/stop
Reason Three : Greater access to confidential information => more opportunities
Reason Four : More interfaces with outsiders => easier to corroborate with outsiders
2019/8/2
Week 1

4. Factors Leading To Unethical Behaviours
2019/8/2
Factors Leading To Unethical Behaviours
Pressures
Mostly >> financial pressures that are non-shareable
Sometimes >> non-financial pressures
Opportunity
Usually associated with weaknesses in internal controls
Unnecessary access to assets of cash value
Difficulty of detecting fraudulent activities
Rationalization : Finding excuses
Absence of avenues for alleviating financial pressures
Unfair promotion system…..
2019/8/2
Week 1

5. Fraud Prevention And Detection
2019/8/2
Fraud Prevention And Detection
Eliminating pressures
Addressing financial and non-financial ones
Open-door policy
Competitive employment terms
Improving working environment
Eliminating opportunities
Improving internal controls and system reviews
Watching for fraud symptoms or red flags
Monitoring employees with internal audit...
Eliminating rationalization
Employing better people and promoting communication
Developing an ethical corporate culture and enforceing a code of conduct...
2019/8/2
Week 1

6. Roles Of Professional Accountants In Fraud Prevention And Detection
2019/8/2
Roles Of Professional Accountants In Fraud Prevention And Detection
HKSA Statement 3.271
No responsibility to prevent fraudulent activities in their clients
Auditor’s responsibility to detect frauds
Substantive tests performed on the debtor ledger
Analytical review procedures to detect unusual transactions
Compliance tests performed on purchase order processing
2019/8/2
Week 1

7. Common Malpractices In Accounting And Finance Functions
2019/8/2
Common Malpractices In Accounting And Finance Functions
Red flags
e.g. poor security over cheques, frequent management overrides, last-minute payment requests, ghost employees, large number of adjustments, unusual endorsements on cheques…
Common malpractices
e.g. accepting advantages for early payments and late collections, reimbursing personal or fictitious expenses, misuse of cheques, teeming and lading ...
Preventive measures
e.g. setting up policies and procedures for payments, collections, credit and reimbursements; random and independent checks, regular review of records, suspense accounts ...
2019/8/2
Week 1

8. Common Malpractices In Purchasing Function
2019/8/2
Common Malpractices In Purchasing Function
Red flags
e.g. close tender bids, unusual location of suppliers, invoice claims just under approval limit, small suppliers for wide range of services, fictitious suppliers and customers, duplicate payments, supplier complaints ...
Common malpractices
e.g. accepting advantages for disclosing information or placing orders, setting up bogus firms, acquiring goods for personal use …
Preventive measures
e.g. setting up policies and procedures for credit-checking and appointing suppliers, random and independent checks on quotations/tenders and details of owners/shareholders, regular review of records for discrepancy from purchase orders, complaints ...
2019/8/2
Week 1

9. Common Malpractices In Inventory/ Stock Control Functions
2019/8/2
Common Malpractices In Inventory/ Stock Control Functions
Red flags
e.g. discrepancies between book and stocks, abnormal stock turnovers, poor segregation of duties, substantial amount of unexplained adjustments to inventory balances...
Common malpractices
e.g. receiving advantages for non- or short deliveries and accepting substandard goods, anomalies with stock loss, stealing goods by writing-off ...
Preventive measures
e.g. segregation of duties or purchasing and cargo receipt, setting up policies and procedures for records keeping and stock write-offs, checks, stocktakes and record reviews ...
2019/8/2
Week 1