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FRAUD EXAMINATION

ALBRECHT, ALBRECHT, & ALBRECHT

Recognizing the
Symptoms of Fraud

CHAPTER 5
Learning Objectives
1. Understand how symptoms help in
the detection of fraud.
2. Recognize and understand
accounting symptoms of fraud.
3. Identify internal controls that help
detect fraud.
4. Identify and understand analytical
symptoms of fraud.
Learning Objectives
5. Realize how lifestyle
changes help detect
fraud.
6. See how behavioral
symptoms help detect
fraud.
7. Recognize the
importance of tips and
complaints as fraud
symptoms.
Discuss the Symptoms of
Fraud.
List 6 Symptoms of Fraud.

Accounting Anomalies -
Ledger Doesnt Balance

Internal 1=1
Control
Weakness -
No Vacation Analytical
Anomalies
List 6 Symptoms of Fraud

Extravagant
Lifestyle
Tips &
Complaints

Unusual
Behavior
List Irregularities to Look for in
Source Documents?
Missing Documents Payee Names &
Stale Items on Addresses = Employee
Bank Reconciliation Names & Addresses
Excessive Voids or Past Due A/R
Credits Reconciling Items
Payee Names &
Altered Documents
Addresses =
Customer Names & Duplicate Payments
Addresses Second Endorsements
Photocopied on Checks
Documents
Accounting Anomalies
Faulty Journal Entries

Inaccuracies in the Ledgers

Ledger doesnt balance

Master or Control Accounts do not


equal the sum of individual customer
or vendor accounts
Identify Symptoms of
Journal Entry Fraud.
Journal entries without support
documentation
Unexplained adjustments to receivables,
payables, revenues or payables
Journal entries that do not balance
Journal entries made by individuals who
would not normal make such entries
Journal entries made near the end of an
accounting period
Discuss the Inaccuracies of
Ledgers
Define a Ledger
A book of accounts
How do you prove the accuracy of a
ledger?
A = L + OE or Dr = Cr
What symptoms relate to control
accounts?
Dr = Cr
Master account balances do not equal sum
of the subsidiary account balances
List & Explain Internal
Control Weaknesses.
Lack of Segregation of
Duties
Lack of Physical Safeguards
Lack of Independent Checks
& Reviews
Lack of Proper Authorization
Overriding of Existing
Controls
Inadequate Accounting
System
List Common Examples of
Analytical Anomalies. Explain.
Unexplained Significant Increase or
Inventory Shortages Decrease in Account
or Adjustments Balances
Deviations from Physical Anomalies
Specifications
Cash Shortages or
Increased Scrap Overages
Excess Purchases Excessive Late Charges
Too Many Debit or Unreasonable Expenses
Credit Memos or Reimbursements
Discuss Questionable Financial
Statement Relationships. Explain.

Revenues with Inventory


Revenues with Receivables
Revenues with Cash Flows
Inventory with Payables
Volume with Increase Cost Per Unit
Volume with Scrap
Inventory with Warehousing Costs
Accounting Anomalies
Comment on Extravagant
Lifestyles.
Financial Pressure

Greed

Spend What They Steal

Significant Improvement in Lifestyle

Flaunt Their Wealth

Living Way Beyond Their Legal Means


What is the Chain that
Leads to Unusual Behavior?

Guilt

Fear
Stress
Behavior
Changes
List Some Unusual
Behaviors.
Insomnia Inability to Look
Increase Drinking People in the Eyes
Unusually
Drug Abuse
Belligerent
Unusually Irritable & Working Standing
Suspicious Up
Unable to Relax Sweating
Lack of Pleasure in Increased Smoking
Former Pleasing Fear of Getting
Things Caught
Review the Fraud Triangle.

e
ur

Ra
ss

tio
re

na
dP

liz
ive

ati
e
rc

on
Pe

Perceived Opportunity
Tips & Complaints Term
Match
Steps Taken by
Theft Perpetrator to
Hide the Fraud
Converting Stolen
Concealment Assets to Cash &
Spending the Cash

Conversion Actually Taking


Cash, Inventory,
Information or
Other Assets
Discuss Why More Frauds Are
Discovered through Tips &
Complaints?
Auditors Focus on Paperwork,
Systems & Information

Fellow Employees Notice Lifestyle


Changes

Complaints & Tips Are Only


Symptoms - the Actual
Investigation Can Show if a Fraud
Exists
Why Do Employees Hesitate to
Report Fraud Symptoms?
Theyre Not 100% Sure a Fraud Is
Occurring
They Dont Want to Wrongly Accuse
Someone
They Have Heard Horror Stories About
What Happens to Whistle Blowers
Intimidation by Fraudsters
Condition Against Squealing
Discuss the Use of
Hotlines.
Hotlines are 800 Phone Numbers
Where Employees Can Provide
Anonymous Tips & Information

Sometimes Set Up by the Company or


Contracted with a Service or
Organization Like ACFE

Run Hot & Cold


Match Terms
Accounting Weaknesses in control
Anomalies environment, accounting
system or control activities
Analytical
Anomalies Theft, Concealment,
Conversion
Elements
of Fraud Relationships, procedures
or events dont make sense
Internal
Control Inaccuracies in journal
Weakness entries, ledger, etc.