Tutorial Questions Week 8

1. Explain how the use of fraud indicators may be helpful in fraud investigations as
opposed to only fraud detection.

In fraud investigations, fraud indicators can helpful in making decisions regarding

what evidence to be gathered.

2. Why are many frauds discovered by accident, not through systematic means?
Frauders often attack places in system where controls and systematics means of
diction , including audit are weak. Such weakness leaving catching the fraud to
chance.

3. Explain the difference between anonymity and confidentiality.

Anonymous data are recorded so that the information can never be linked to
the subject who supplied it. Confidential data are recorded so that the
information is not immediately identified with the subject who supplied it, but
such a link is possible.
With anonymity, the tipster does not reveal his identity. With confidentiality, a
promise ismade to protect the tipster’s identity.

4. How does an internal auditor maintain independence?

internal auditors should have no personal or professional involvement with or
allegiance to the area being audited; and should maintain an un-biased and
impartial mindset in regard to all engagements

5. How does fraud detection relate to the internal control process?

Fraud deterrence are measures to stop fraud occurring in the first place, whereas fraud
detection involves identifying fraud as quickly as possible once it has been perpetrated
states that fraud detection and deterrence must operate together.
Fraud detection is an integral part of the internal control process. Internal controls can be
preventive, detective, or corrective.

6. Preventive controls seek to stop fraud before it happens. What is the relative impor-
tance of preventive controls (versus detective and corrective controls) in the industry
in which a business operates? For example, are detective controls relatively more
important in the financial services industry versus the media services industry?
Explain.

The industry can be of great importance in this regard.For example, weak detective controls in a wire
transfer department could lead to millions of dollars in losses over a very short period of time. So
prevention and detection would be paramount in a wire transfer department. But in a media services
company, the main risk of fraud might be with, say, bid rigging, which though very serious, might not
justify the focus on detection that would be expected in a wire transfer department

7. Explain false positives versus false negatives in fraud detection. What trade-offs
 are involved in their application? For example, what is the trade-off between
false negatives and fraud correction costs?

8. Explain how fraud investigations can detect fraud.

Fraud investigations are detective of fraud to the extent that they follow up on fraud
signals in order to confirm or disconfirm the presence of fraud. But once fraud is
confirmed to exist, fraud examinations shift toward gathering evidence and become
corrective by assisting in recovery from the perpetrator and other sources such as
insurance
9. Explain how fraud investigations can prevent fraud.
Uncover potential weakness in control. By revealing the facts

10. How important is the effect of deterrence in a fraud management system? What factors
besides prosecutions deter fraud?
While no system is completely foolproof, there are steps which can be
taken to deter fraud and make it much less attractive to commit. It is in
assisting organisations in taking such steps that this guide should prove
valuable.
once fraud is confirmed to exist, fraud examinations shift toward gathering
evidence and become corrective by assisting in recovery from the
perpetrator and other sources such as insurance

11. Give two examples of an incidence that could be caused by either fraud or error.
1. And incorrect bank deposit slip
2. Incorrect change being made by a cashier working at a cash register

12. Why must the total cost of fraud, include not only losses but also costs of prevention,
detection, and correction?
The costs of losses versus prevention, detection, and correction are inter changeable. Changing
any one of these costs affects losses

13. Consider the fraud triangle. What does it suggest regarding fraud indicators in the case
of a cashier who may be skimming sales receipts?
The three sides of the triangle are pressure/ incentive, opportunity, and rationalization/ attitude.
As a minimum the fraud triangle suggest that the cashier has the opportunity, probably due to
weak controls.

Case
Ashley Wesley is the assistant controller at the Walitin Construction Company. Walitin is
headquartered in Miami, Florida, and has a general contractor’s license in 30 different states.
It is a privately held company with about 5,000 stockholders, with the majority of the stock
being owned by the Walitin family.
Roberta Walitin has been the CEO of Walitin Construction for the previous 12 years. Everyone
considers her an excellent leader with excellent business skills. She has an undergraduate degree
from the University of Illinois in engineering and an MBA from the same school with a
concentration in accounting.

Roberta has always insisted on ethical business practices, so two years ago she worked
with Ashley to set up an ethics hotline, which Ashley personally manages on a daily
basis. Anyone either inside or outside of the company can submit tips anonymously by e-
mail, telephone, or a special Web page she had set up. There is a prominent link to the
hotline on the home page of the company’s Web site.

Since Ashley set up the hotline, she has received three tips, all via the Web. In every case,
the tip was about a subcontractor overbilling the company for services rendered. In two of
the cases, she was unable to confirm or disconfirm whether there was fraud, mainly
because it is almost impossible to investigate the work of a subcontractor on a job that has
already been completed. But in the other case, she caught a roofer billing for fictitious
work. She did not report the fraud to authorities, but Roberta did immediately replace the
subcontractor with another roofing company. Ashley reports to Bob Benson, Walitin’s
controller. He’s been with the company for many years and works very closely with
Roberta. His main interest seems to be producing the financial statements and working
with her to obtain new clients. Roberta and Bob spend large periods of their time going to
lunches with clients, participating in civic meetings, and helping in small community-
service construction projects.

Because Bob is busy so much of the time with outside activities, Ashley pretty much runs
everything in accounting on her own except for the software and hardware, which Bob
manages in conjunction with the head of the IT department.
Bob is not interested in details, and anytime Ashley tries to explain something to him, he
simply waves a hand and says, “Don’t worry me with operational issues. Just take care of it.”
Ashley has learned to live with his hands-off approach.

Overall, Ashley runs everything smoothly. Her main problem is that Betty Grabber, the senior
accountant reporting to her, wants Ashley’s job. To make things worse, Betty is a niece of
Roberta Walitin’s husband.
Betty is a very wily person. Her goal is to have Ashley fired, and she’s been using her family
connections to get the message to Roberta that Ashley is scheming to have Bob Benson, the
controller, fired. Ashley also suspects that Betty has been spreading a rumor that she’s
planning to go to work for a competitor if she is not successful in taking over Bob’s job.
Ashley is unsure as to whether Bob is aware of the rumors. He seems to be avoiding her
recently, and there seems to an edge in his usually friendly voice. Ashley is feeling depressed just
thinking about it. She’s heard that Bob is having serious marital problems. Perhaps those
problems are affecting the way he acts.
This morning Ashley had a major surprise when she started reading her e-mail, which contained
a new anonymous tip. Someone had submitted it last night via the Web, and it had
automatically been forwarded to her via e-mail. The tip read as follows:
To: Walitin Tip System
From: http://www.webuser@walitinconstructionservices.com
Sent: Tuesday 8/1/2015
Ms. Wesley,
I’m sending this tip to help you. I understand what you are going through. You’re working for
a liar and a thief. Bob Benson is hacking the accounting system to produce fraudulent
financial statements. He’s doing it in such a way that you’ll get the blame. It’s going to be a
big mess.
1. What should Ashley do? Should she try to investigate? Should she report the tip to
Roberta?
She should report, so that the matter could be investigated.

2. Evaluate Walitin’s hotline and make recommendations for its improvement.

Its good way to get tip and by doing this the company could gain from losing
from the fraud which is going in the business e.g the financial statement fraud as
mention also the subcontractor over billing. The company could put the incentive
and keep the tipster anonymity