Ch 17 - Who Commits Fraud and How?

Question 1

What is required to begin a fraud examination?

Answer 1

Predication - the totality of circumstances that would lead a reasonable, professionally trained, and prudent individual to believe fraud has occurred, is occurring, and/or will occur.

Question 2

What is the Fraud Theory Approach?

Answer 2

• Analyze available data
• Create a hypothesis
• Test the hypothesis
• Refine and amend the hypothesis

Question 3

What anti-fraud measure results in the highest number of initial detections?

Answer 3

Tips - over 40% of initial detections

Question 4

What are the top 3 anti-fraud measures?

Answer 4

• Management Review
• Employee Support Programs
• Hotline

Question 5

Factors that increase the opportunity to commit fraud:

Answer 5

• Ability to get around internal controls
• Inability to judge performance
• Failure to discipline prior frauds
• Lack of access to information
• Ignorance, Apathy, Incapacity
• Lack of an audit trail

Question 6

What is internal control?

Answer 6

A system of both financial and non-financial practices that individuals in an organization are required to follow to ensure that the organization runs smoothly.

Gaining an understanding of Internal Controls is where a Fraud Investigation starts!

Question 7

Basic principles of internal control:

Answer 7

1. Ethical work environment
2. Personnel selection & management
3. Proper procedures
4. Physical safeguarding
5. Segregation of job duties
6. Bonding, vacations, job rotation
7. Proper authorizations
8. Independent verification

Question 8

What does the internal control of an ethical work environment consist of?

Answer 8

Setting a tone of integrity in the workplace

• Setting a good example
• Don’t expect employees to take controls and ethical behavior seriously if you don’t
• “Tone at the Top”

Question 9

Do most embezzlers start out honest?

Answer 9

Yes, lives change.

Question 10

What is an internal control related to personnel selection?

Answer 10

Perform background and reference checks for new hires

Question 11

What are controls surrounding physical safeguarding?

Answer 11

• Limit/control access to physical assets

- Periodically check inventory

Question 12

What does segregation of duties consist of?

Answer 12

• Preventing overlapping functions

- Rotating functions among employees

Question 13

Separation of Asset Custody from Accounting:

Answer 13

Individuals with custody of assets should not be responsible for accounting for asset

For example, the same individual should not check-in inventory purchases and write the checks for payment

Question 14

Separation of Authorizing transactions from Accounting:

Answer 14

For example, desirable to have different individuals authorize payment of an invoice and sign the check for paying the invoice

Question 15

Separation of duties within the Accounting function:

Answer 15

An individual who performs all the accounting functions not only has an easier time committing fraud but also has no outside scrutiny to catch errors

Several employees should have interlocking accounting duties

For example, the same individual should not receive cash and disburse cash

Question 16

Separation of Operational responsibilities from Accounting responsibility:

Answer 16

Especially true if the individual is evaluated on the records/results (shouldn’t keep the records on which your job performance is evaluated)

May be encouraged to keep records in a way that erroneously demonstrates better performance

Question 17

What is the internal control, bonding?

Answer 17

A financial guarantee of trustworthy employee performance