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Section Topics Discovery sampling Interrogation techniques
Forensic auditing Use of computers in analyzing data Red flags Types of fraud Part 2, Section D
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Fraud Investigation Roles and Players Part 2, Section D, Introduction
Standard 1210.A2 “Internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in which it is managed by the organization, but are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud.” Part 2, Section D, Introduction
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Part 2, Section D, Introduction
Discussion Question What are some of the objectives of a fraud investigation? Sample answer: Protect the innocent, establish facts, resolve the matter, and clear the air. Quickly stop loss. Support successful prosecution. Identify, gather, and protect evidence. Identify and interview witnesses. Identify behavior patterns. Determine motives and suspects. Provide basis for discipline, etc. Account for and recover assets. Identify control weaknesses to be fixed. Part 2, Section D, Introduction
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Discussion Question If you are interviewing (not interrogating) an audit client, why do you establish rapport? What are some methods of doing so? Sample answer: Why—To make client comfortable with providing information. Methods—Agree on convenient time and place; keep number of interviewers to a minimum; dress appropriately for client and situation; use open, attentive body language. Part 2, Section D, Topic 2
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Discussion Question What are some hallmarks of active listening?
Sample answer: Soft eye contact. Facial expressions showing interest. Brief silences to allow for more information. Paraphrasing. Unobtrusive note-taking. Part 2, Section D, Topic 2
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Discussion Question What are some examples of open and closed questions? Answer: Type Use Examples Open To invite opinions, descriptions, narratives, etc. Please describe your unit’s step-by-step recycling procedure. How often do employees skip a step in the approved process? Closed To uncover facts in brief statements; to get to yes or no. Part 2, Section D, Topic 2
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Discussion Question What are some interview behaviors that you would consider indicators of fraud? Sample answer: Restlessness. Anxiety Leaning away Attitude change No eye contact Changing answers Inappropriate attitude Part 2, Section D, Topic 2
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Interviewing Model Prepare Document Conduct Agree Define goals.
Get background. Plan questions, strategies. Document Conduct Complete report soon. Don’t transcribe. Include attitude, next steps. Stick to plan. Verify fact or hearsay. Take notes. Agree Summarize key points. Confirm or correct points. Part 2, Section D, Topic 2
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Discussion Question Match the questioning method on the right to the appropriate context for using that method on the left. Answers: Interview Interrogation A You don’t already know the answers. B You are a specialized fraud investigator. A You want to confirm or eliminate suspicion of fraud. B You want a confession. Part 2, Section D, Topic 2
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The Forensic Auditor Internal auditor Forensic auditor
Identifies fraud indicators. Gathers evidence suitable for use in court—and can present it in court. Knows when to call for full fraud audit. May be certified by Association of Certified Fraud Examiners (ACFE). Pieces together the fraud narrative from experience, knowledge, and intuition. Part 2, Section D, Topic 3
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Discussion Question What are some types of information that computers can provide? Sample answer: Word-processed documents Customer lists logs Financial records Scheduling systems or logs Operations logs Personnel records Voice mail (computer-stored) Internet history reports Computer forensics Part 2, Section D, Topic 3
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Types of Computer Analysis
Numerical analysis Study of number sequences (e.g., check amounts) for unlikely patterns, often using Benford’s Law Regression analysis Computer analysis of relationship between variables—one dependent on the other(s) Enterprise auditing Mining data in enterprise-wide systems to identify suspicious patterns Continuous online auditing Comparison of transactions as (or soon after) occurrence against predefined acceptable patterns Part 2, Section D, Topic 4
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Types of Red Flags Audit cycle red flags Environmental red flags
Industry- specific red flags Perpetrator red flags Part II D-5 Part 2, Section D, Topic 5
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Discussion Question What are some examples of audit cycle red flags?
Sample answer: Unusual increases; sales to shipments discrepancies; slow collections Revenue cycle Expenditure cycle High turnover in purchases/payroll; inordinate purchasing from a vendor Production cycle Consistent overruns; excessive waste or write-offs; unsecured warehouse Financing cycle Changes to key figures pre-financing; sales receivables discrepancies Part 2, Section D, Topic 5
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Discussion Question What are some examples of environmental red flags?
Sample answer: Stiff, unfair competition Lax regulation Industry or cultural tendency toward illegal practices (bribes, etc.) Loss of contracts; reorganization that disrupts control policies; poor ethics training International organizations and organizations dependent on computer technology Part 2, Section D, Topic 5
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Discussion Question What are some examples of industry-specific red flags in the following areas? Sample answer: Financial services Misstatement of sales and earnings; diversion of cash from accounts; phony loans Insurance Fraudulent claims; payouts to phony clients; misevaluation of underwritten properties Manufacturing Cost overruns and discrepancies Energy False valuation of assets; misstatement of profits; bribes and cover-ups Part 2, Section D, Topic 5
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Discussion Question What are some examples of perpetrator red flags?
Sample answer: Pattern of complaints Decline in morale or attendance Abrupt resignations Evasive answers; adversarial attitude; lack of cooperation during audit Unexplained variances; unusual shortages in cash or inventories; missing or altered documents Managers who are late with reports, play favorites Part 2, Section D, Topic 5
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Discussion Question What are some examples of financial statement red flags? Sample answer: Fictitious revenues Improper asset valuation Concealed liabilities Improper disclosures Part 2, Section D, Topic 5
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Discussion Question What are some examples of fraud in each area?
Sample answer: Financial statement fraud Fictitious revenues; intentional, improper transfer pricing; concealing liabilities Cash theft Skimming cash; diverting payments; pocketing deposits; selling waste and keeping proceeds Fraudulent disbursement Diverting money from phony accounts to oneself; altering timecards; faking expense reports Misuse or theft of assets Sale of fictitious assets; intentionally concealing events, transactions, or data; theft of office equipment and supplies Bribery and corruption Illegal business activities; intentional errors to reduce tax liabilities; failure to act as required; bid rigging Part 2, Section D, Topic 6
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Reinforcing Activity 2-8 Fraud Knowledge Elements
Part 2, Section D Fraud Knowledge Elements Part 2, Section D
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End of Section D Questions? Part 2, Section D
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