Chapter 5

Importance of Accounting Professionals in the Investigation

By: Irma Lisa Daduya

Skeptical Mindset
Is something that has long been inherent in forensic accountants and
other internal investigators when looking for evidence of fraud.

Conventional Auditor
Monitoring the financial statements to see if it is in compliance with GAAP
and thereby fairly represent the financial condition of the company.

Investigative Mindset and Skepticism

The most important qualities the accounting professionals can bring to

any fraud investigation.

Investigative Accountants
Should bring independence and objectivity, as should the auditor.

Fraud investigation is part art and part science.

Important Roles of Accounting Professionals in any Forensic

Investigation:
Lead financial investigators
Expert witness
The good financial investigator must be knowledgeable about fraudulent
practices both in general and for a specific industry.

Primary Sources of Evidence:

1. Accounting records
2. Interview process
The Financial Investigator must also be a good Psychologist and be able to
assess the greater or lesser likelihood that any given suspect is a fraudster

Role of the Accounting Professional

By: Maria Jenica Aira Sarmiento

Independent Auditors
CPA or accounting firms that performs audits of commercial and non-
commercial financial entities
Auditors strive to maintain a high level of independence to keep the
confidence of users relying on their reports.
Auditors responsibility
Responsive in audit of financial statement and effectiveness of internal
control
Obtain reasonable assurance
Off-book frauds
Receipts of cash is never reported to the entity
Most difficult to detect
Skimming, bribery and kickbacks
On-book frauds
Theft of money that has already appeared on a victim companys book
Cash larceny

Statement of Auditing Standard 99

1) Gather information needed to identify risks of material misstatement due
to fraud
2) Assesses risks after taking into account an evaluation of the entitys
program and controls and;
 3) Responds to the results

Professional Skepticism
An attitude of the auditor that neither assumes management is
dishonest nor assumes unquestioned honesty
Questioning mind
Critical assessment of audit evidence
The Fraud Triangle
1) Incentives/pressure management or other employees have incentives
or pressures to commit fraud
2) Opportunities circumstances provide opportunities for management or
employees to commit fraud
3) Attitudes/ rationalization an attitude, character or set of ethical
values exists that allows management or employees to commit a
dishonest act.

Internal Controls
By: Honey Rose P. Resuello

Internal Control
is effected by an entitys board of directors, management and other
personnel, designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:

a. Reliability of Financial Reporting

b. Efficiency and Effectiveness of Operations
c. Compliance with Laws and Regulations

Management, not the auditor, must establish and maintain the entitys
internal control.
 COSO Components of Internal Control:
a. Control Environment is the foundation of all other components of
internal control.
b. Risk Assessment identifies and analyzes external or internal risks
affecting achievement of the objectives at the activity level as well as
the entity level.
c. Control Activities are the policies and procedures helping to
ensure that management directives are executed and actions are
taken to address risks affecting achievement of objectives.
d. Information and Communication relevant internal and external
information should be identified, captured and communicated in a
timely manner and in appropriate terms.
e. Monitoring is a process that assesses the quality of the systems
performance over time.

Common Control Procedures

a. Access Controls
b. Authorization and Approval Limits
c. Segregation of Duties
d. Management Controls
e. Human Resource Controls

Chapter 6
BUSINESS AS A VICTIM
By: Daisy Mae Verosil

Business can be a victim of both internal and external fraud.

INTERNAL FRAUD

Perpetrated by employees.

EXTERNAL FRAUD

Deception committed by an outsider against the company.

The key factor is to recognize the warning sign of fraud: To understand how fraud
is committed is to understand how to minimize its possibility.

RED FLAGS

These are conditions which are normally present whenever a fraud is

committed. Internal auditors should be alert in determining red flags or
possible indicators of fraud.

Employee theft

is defined as any stealing, use or misuse of an employer's assets without

permission. The term employer's assets are important because it implies
that employee theft involves more than just cash.

Cash is the favorite target of fraudsters much is taken by outright cash larceny
and skimming but the majority is stolen through more elaborate disbursement
schemes.

So what are some red flags indicative of serious employee theft?

Unexplained inventory shortages

Incomplete or false customer information
Lack of documents to justify inventory write-offs
Observing unexplained or suspicious employee behavior

PAYROLL FRAUD
By: Magnolia R. Carrera

Payroll fraud
Is the theft of cash from a business via the payroll processing
system.

common payroll fraud includes:

Ghost Employee Fraud
Falsification of a Time Sheets
False Expense Report Fraud

FRAUDULENT BILLING SCHEMES

 are the most common type of fraudulent disbursements. A billing
scheme is a fraud aimed at the payments system of a business. Its
main purpose is to manipulate that system and cause the business
to make a fraudulent payment to the employee.

Three (3) Main Categories of Fraudulent Billing Schemes :

1. Shell company schemes
2. Pay-and-return schemes (Overbilling involving existing vendors )
3. Personal purchase schemes

FRAUD COMMITTED BY OUTSIDERS

Credit card and insurance fraud are perpetrated against companies by
outsiders.

CORPORATE FRAUD
By: Kristine Mae Reyes

Corporate fraud
Is committed by senior management to benefit the corporation as whole.
This type is fraud includes financial statement fraud, antitrust violations,
securities fraud, tax evasion, false advertising, environmental crimes and
the production of unsafe products.

Financial Statement Fraud

Is usually committed in order to improve the earnings and hence the
stock price of publicly traded companies or the ratios supporting loan
covenants at private companies.

Example:

Financial statement falsification, which includes:

Extending the depreciation period to delay depreciation recognition
Shifting debt to special purpose entities
 Accelerate the recognition of revenues and delay the recognition of
expenses
Capitalize expenses
Counting nonexistent inventory, which reduces the cost of goods sold

Management Fraud
Fraud by management can be extremely serious since senior personnel
can override the controls that have been put in place to prevent the very
fraud they are committing. The effects of management misconduct can
also have severe consequences for the companys overall morale and set
a negative model for employees farther down the company ladder

Examples of Management Fraud:

Window dressing
Misappropriation of assets
False insurance claims
Using companys assets for personal use

IDENTTITY THEFT
By: Judy Ann Yanes

Identity Theft

considered as one of the growing crimes

defined as the deliberate assumption of another persons identity
usually to gain access to their finances or frame them for a crime.
also been defined as someone else using your personal information to
create fraudulent accounts, to charge item to another persons existing
accounts, or even to get a job.

Ways in which Identity Theft Manifests Itself:

 Large-scale intrusions into third party credit card processors
Theft of printed checks from the mail
Theft of preapproved credit cards from the mail
Credit card skimming

Credit Card Skimming

is a type of credit card theft where crooks use a small device to
steal credit card information in an otherwise legitimate credit or debit
card transaction.

Insights on How to Reduce the Risk of Identity Theft

Guard your Social Security number
Monitor your credit report
Shred old bank statements and credit card statements
Taking bill payments and checks to the post office
Examine credit card charges before paying the bill
Never give credit card numbers or personal information over the phone