Chapter 5: Recognizing the Symptoms of Fraud

Question 1

6 Groups of the Symptoms of Fraud

Answer 1

1. Accounting anomalies
2. Internal Control Weaknesses
3. iAnalytical anomalies
4. Extravagant Lifestyle
5. Unusual behavior
6. Tips and Complaints

Question 2

accounting anomalies

Answer 2

unusual processes or procedures in the accounting system
common symptoms: problems with source documents, faulty journal entries, and inaccuracies in ledgers

Question 3

internal control weaknesses

Answer 3

vulnerabilities in a company’s system of controls

Question 4

ways to implement a system of independent checks

Answer 4

employee transfers
audits
mandatory vacations

Question 5

analytical anomalies

Answer 5

relationships in financial or non-financial data that do not make sense, such as an unreasonable change in a volume, mix, or price.

Question 6

lifestyle symptoms

Answer 6

indications a person may be committing fraud, such as suddenly buying an expensive house, driving luxury cars, and wearing expensive clothes and jewelry

Question 7

behavioral symptoms

Answer 7

personality signs that a person may be committing fraud, such as a sudden “jekyll and hyde” personality or exhibiting dramatic highs and lows.

Question 8

Which accounts are vulnerable to fraudulent entries?

Answer 8

Expenses (an increase to expense)

keeps the accounting equation balanced, but also doesn’t look as suspicious as decreasing a revenue account.

Also, it gets closed out to retained earnings at the end of the year, so it becomes more difficult to catch at EOY.

Question 9

Common fraud symptoms relating to ledgers

Answer 9

1. a ledger that does not balance
2. master (control) account balances that do not equal the sum of the individual customer or vendor balances.

Question 10

Most common element in fraud:

Answer 10

the overriding of existing internal controls

Question 11

3 simple procedures that small business owners should do personally

Answer 11

1. reconciling the bank statement
2. pay everything by check or with a specific credit card (provides a record or they should be the only person able to make electronic bank transfers)
3. if they use checks, sign every check themselves and do not delegate the signing to anyone else.

Question 12

analytical procedures

Answer 12

overall analyses that look at ratios, trends, patterns, etc. to provide measures of whether amounts are reasonable.

not always effective because sometimes analytical relationships stay the same even though there is fraudulent transactions.

Question 13

Who is in the best position to detect fraud?

Answer 13

the employees of the company

they are closest to each other, and they work with each other so they can detect behavioral changes.

Question 14

reasons why people don’t come forward

Answer 14

1. it is usually impossible to know for sure that a fraud is taking place
2. they fear reprisal for being a whistle-blower
3. they are often intimidated by the perpetrator
4. they often think that squealing on someone is wrong
5. it is not easy to come forward within many organizations.