Lesson

Overview

The reason a company places emphasis on its internal control system is to

keep fraud from occurring. Although reducing fraud losses is still a valid
concern, more companies are now emphasizing internal controls because they
monitor the consistency with which transactions are completed. This change
in emphasis has been brought about by the realization that a company can
generate a significant competitive advantage by improving the quality and
speed of delivery of its products by tightly monitoring its system. This lesson
will give you an overview of control- why they are used, how to create them
and when to eliminate them. will discuss how responsibility is assigned for
various controls. A set of control points that will be useful for controlling the
basic function. Part also of the lesson a rough overview of fraud is also
discuss: the type of fraud, how to detect and how to prevent it.

Learning Objectives

At the end of the lesson you will learn how to:

Explain objectives of internal control.

Determine and discuss the responsibilities for internal control.
Give examples of internal control.
Define the basic types of fraud and give examples of it.
Explain how to prevent fraud.
Analyze how to deal with fraud.
Discussions
Types of Fraud

Financial Fraud is an intentional act of deception involving financial transactions for purpose of
personal gain.

Basic Types of Financial Fraud in Business

Embezzlement - the illegal used of funds by a person who control those funds.

Act may include:

1. Double check fraud - employee writes 2 checks each time a bill is paid. One check to the vendor
and the other to the employee
2. Check kiting - draws a checks for more than the amount available in the account. Then deposit the
check and withdraws from the second account. Then deposit the amount back into the original account
before the bank registers the transaction or check clears the first account.
3. Payroll fraud-processing payroll of fictitious employees
4. Overtime reporting fraud

Internal Theft - stealing of company's assets by employee.

Pay-off and kickback - employee accepts or other cash benefits in exchange for access to company's
business.

Skimming - employee takes money from receipts and don’t record the revenue in the books. Cheque
fraud - insufficient or fake cheque.

Banking/Identity Fraud - someone acquiring your banking details and then using them to steal from
your accounts.
Direct Theft - "lift stock" or pocket payments by filing to process the sale or deleting invoices. Invoices
and payment fraud - paid for incoming invoices for something the company has not ordered or received.

Fraudulent financial reporting - action of deliberately issuing misleading FS in order to protect the
financial reputation of the company and falsely satisfying the needs of FS users.

Money laundering - a crime involving the movement of illicit money and other gains into legitimate
channels in order to disguise the money's illegal sources.

Ponzi Schemes - investment schemes that promises to pay relatively high interest rate of returns for fixed
term investment.
 1. Give an example of issues/incidents about the following (Preferably an actual incident):

Embezzlement.
Bank Identity Fraud
Invoice and Payment Fraud
Fraudulent Financial Report
Pay-off and Kick-back
Money Laundering

2. How did it happen? What have been the results of such incidents?
3. If you are the Controller group in the company, what internal controls would you
recommend to the company's President (at least 3).

Rubrics for Grading Quizzes (Fraud)

Criteria 15 12 9 6
Example Example is Some Few All
related to answers are answers are answers
the topic reasonable reasonable are not
and related. and related. reasonable
and
related.
Depth and Discussion is Discussion Discussion Discussion
Clarity of very is clear. is lacks
discussion on thorough. acceptable, depth
the reason and and
results of thoroughne
fraud. ss
Recommendation Very good Good Fair Senseless
recommendatio recommendatio recommend recommen
n n a tion d ation
Grammar & No Has few Has a Has many
Sentence grammatical, grammatical number of grammatica
Constructio spelling or , spelling or grammatical l , spelling
n punctuation punctuation , spelling or or
errors. errors. punctuation punctuation
errors. errors.
 Reference

Anderson, J. and Bragg, S.(2004), Controllership: The Work of the Managerial Accountant, 7 th edition
(2004), John Wiley and Sons, Inc., USA.

Anthony, R., Govindarajan, V., Hartman, F., Kraus, K., and Nilsson, G. (2014) ManagementControl
Systems, McGraw Hill Education, USA.