3 min read

Fraud Auditors

2019-09-26

Frauds

Fraud elements;

  • Materiality
  • Representation is knowingly false
  • Reasonably placed reliance on the representation by someone else
  • Result in financial damages

DOJ defines illegally activities;

  • Obscure invesigations
  • Inside dealings
  • Accounting fraud (aka occupational fraud)

Obscure invesigations;

  • Delete computer files
  • Shred, alter, refuse to provide documents
  • Bribery

Inside dealings:

  • Bids
  • Executive loans
  • Share trading

Accounting frauds reported by ACFE;

  • Asset misappropriations
  • Corruptions
  • Fraudulent financial reportings (Sales/AR + Payment/AP + Payroll/T&E)

Position of fraud auditors;

  • Internal and External auditing: risk assessment, internal control, COSO, SOX 2002, ISACA,
  • Fraud auditor: red flags, detection, data analytics,
  • Forensic accountants: known facts, confess/witness, FCPA,

Fraud risk assessment SAS99

Enterprise risk management;

  • Business risk: Objective (startup going concern issue, IPO), activity process,
  • Inherent risk: Industry issues,
  • Management risk: Risk appetite,

Fraud triangle/Fraud diamond;

  • Pressure: incentive, life style,
  • Opportunity: weak internal control
  • Rationalization: personal feeling

Internal controls SAS78;

  • Whitstlebower system: tips from suppleirs and customers
  • Duty segregation
  • Sudden internal process changes (accounting circle)
  • Don’t exercise stipulated controls (approved suppliers list)

Red flags of transactions;

  • Timing: frequency
  • Amount: too much, same amount, round numbers, below limit,
  • Counterparties: unknown
  • Voided checks: no explanation
  • Insufficient supervision: signature
  • Adjustment to accounts: pattern
  • Vendors: same vendors’ names with different address, one of customers,

Level of audit risk;

  • CR + IR + DR = AR
  • Audit assertions: completeness, existence,

Asset misappropriations

Cash;

  • Theft, embezzlement
  • Skimming: unrecorded cash sales
  • Larceny: steal before deposited to the bank
  • Billing: shell company
  • Check tampering: intercept outgoing checks (pre-signed checks)

Inventories;

  • Theft
  • Weight of inventories
  • Damaged good returned vs purchases (quanlity measurement)
  • Defect sold products as inventories

Payroll;

  • Ghost staffs (staff count, starter vs leaver)
  • Falsified work hours
  • Commission computation

T&E;

  • Personal expenses
  • Inflated expenses for reimbursement (keep cash or voucher)
  • Fictitious expenses (blank receipts, letterhead, paid by clients)
  • Multiple payments (every two weeks for expense claims, 30 days limit)
  • Mileage claims computation

Payroll/T&E controls;

  • Hiring function vs Payroll duties: keep seperate hire reocrds
  • Payroll preparation vs approval vs distribution payment vs reconcilaition

  • Seperate payroll bank accounts

  • Pay changes approved by manager and HR
  • Excessive overtime
  • Regular comparison (trend, budget/forecast, peers, departments, production schedule, improve productivity)
  • Holiday/leaves/weakends

  • Forged signature

  • Commission vs sales vs unrealized sales

  • linear correlation

  • Approved travling (SAP Concur)
  • Use P-Card for individual expense exceeding the threshold (not cash)
  • Detailed expense claim reports (when, where, who, what, how much)
  • Original supporting documents required (not scanned copy)
  • Poor quality receipts (consecutiely numbered receipts)

  • Spot-check (client records, never appear)

Corrpution

  • Conflict of interest
  • Bribery (record as a part of COGS)
  • Kickback (construction bids)

Fraudulent financial reportings

Revenue;

  • Sale incentive, sales price, sales promotion,
  • Recognition: premature
  • Cut-off: unearned revenue, POC, unshipped goods,
  • Classification: one-time gain
  • Existence: bogus sales
  • Round-tripping trades: purchase unnecessary inventories and sell back to supplier later (slow-moving AR).
  • Parked sales: goods shipped to other warehouses owned by the firm
  • Channel stuffing/side deals: overselling products to customers with hidden terms (discounts, return, cancel)

Ratios;

  • AR turnover (days)
  • GP/Net Sales, Net Sales/AR
  • Return/Gross Sales (reverse after YE), Discount/ Gross Sales
  • Adjustment: write-offs

Asset/liability misstatements;

  • Capitalized expenses
  • Non-existent PPE
  • Improper assets valuation (IA, wastes, unauthorised PPE sales, dispose leased firm cars to RPT not at arm’s length)
  • Overstated cash by forged bank statements
  • Overaccrued restructuring reserves offset expenses
  • Transactions with unconsolidated SPV (debts, impairment assets)
  • Record barter transactions as sales
  • Service contracts have less audit trails as compared to physical transactions
  • Deferred expenses (improperly record salary across border)