Chapter 5: Recognizing the

Symptoms of Fraud

2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.
 Chapter 5 is the first of two chapters that deal with fraud
detection. Although the act of fraud itself is seldom observed,
symptoms and indicators of fraud are often observable. In
this chapter, we discuss several fraud symptoms in an
attempt to help you recognize when fraud is occurring.

If these fraud symptoms are recognized, many frauds can be

detected at an early stage. We share many examples of
various real-life frauds and how they could have been
detected if the fraud symptoms had led someone to
investigate.

2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.
1. Understand how symptoms help in the detection of fraud.
2. Identify and understand accounting symptoms of fraud.
3. Describe internal controls that help deter and detect fraud.
4. Identify and understand analytical symptoms of fraud.
5. Explain how lifestyle changes help detect fraud.
6. Discuss how behavioral symptoms help detect fraud.
7. Recognize the importance of tips and complaints as fraud
symptoms.

2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.
Can be separated into six groups:
1. Accounting anomalies
2. Internal control weaknesses
3. Analytical anomalies
4. Extravagant lifestyle
5. Unusual behavior
6. Tips and complaints

2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.
 Accounting anomalies result from unusual
processes or procedures in the accounting
system.

Common anomaly frauds involve:

Irregularities in source documents
Faulty journal entries
Inaccuracies in ledgers

2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.
 Internal control fraud symptoms include:
Lack of segregation of duties
Lack of physical safeguards
Lack of independent checks
Lack of proper authorization
Lack of proper documents and records
Overriding of existing controls
Inadequate accounting system

2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.
Analytical Fraud symptoms include:
Unexplained inventory shortages or adjustments
Deviations from specifications
Increased scrap
Excess purchases
Too many debit or credit memos
Significant increases or decreases in account
balances, ratios, or relationships
*See the book for more
2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.
 Peoples lifestyles change when they embezzle,
example, Kay

Embezzled $3 million from her employer

Bought a new, expensive home
Bought five luxury cars
Filled home with artwork and glass collections
Bought a boat
Paid cash to have yard landscaped
Served lobster flown in from the east coast

2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.
 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
2016 Cengage Learning. All Rights Reserved. May not be scanned, copied, or duplicated, or posted to a publicly accessible website, in whole or in part.
 Complaints and tips are categorized as fraud
symptoms
Employees tips may be motivated by malice,
personal problems, or jealousy.
Tips from spouses and friends may be
motivated by anger, divorce, or blackmail.
Whenever tips or complaints are received,
they must be treated with care and
considered only as fraud symptoms.

2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website in whole or in part.