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Internal Systems > Chapter 6: Preventing Fraud > Flashcards

Chapter 6: Preventing Fraud Flashcards

1
Q

What is fraud? (1)

A

An intentional act involving the use of deception to obtain unjust or illegal advantage.

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2
Q

What are the different types of fraud? (4)

A
  1. Employee crimes against employers eg theft, falsifying expense claims.
  2. Crimes against investors, customers and employees eg financial statement fraud.
  3. Crimes by professional criminals eg money laundering.
  4. Crimes by people using computers eg spam, hacking.
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3
Q

What are the different offences of fraud? (3)

A
  1. Fraud by false representation= representations as fact which they know to be untrue.
  2. Fraud by failing to disclose= failing to disclose information when under a legal obligation to do so.
  3. Fraud by abuse of position= eg where they are trusted to safeguard money and they abuse that power.
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4
Q

What are the prerequisites of fraud? (3)

A
  1. Dishonesty.
  2. Opportunity.
  3. Motive.
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5
Q

What are preventative controls? (1)

A

They reduce opportunity and remove temptation from potential fraudsters.

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6
Q

What are examples of preventative controls? (6)

A
  1. Anti fraud culture= eg not overlooking small unethical practices.
  2. Fraud awareness=staff are made aware in training that fraud could be taking place.
  3. Publicity= serves as a warning to potential fraudsters and a reminder for those responsible for controls.
  4. Whistle blowing= people should be encouraged to raise the alarm if they suspect anything.
  5. Internal control systems= they should monitor fraud by identifying risks and putting controls to monitor and report those risks.
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7
Q

What are the main types of fraud? (3)

A
  1. Theft= dishonestly appropriating another’s property with the intention of depriving them of it.
  2. False accounting= dishonestly destroying, concealing or falsifying any account, record or document with a view of personal gain.
  3. Small scale theft= theft that will go unnoticed.
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8
Q

What are examples of large scale theft? (4)

A
  1. Writing fraudulent cheques.
  2. Stealing intellectual property.
  3. Submitting false expense claims.
  4. Payroll fraud eg creating fake employees.
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9
Q

What is collusion? (1)

A

Individuals pool their resources together to achieve their aims.

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10
Q

What are examples of collusion? (3)

A
  1. Customers working with employees to share benefits eg discounts, uninvolved deliveries.
  2. Commissions paid from a supplier to an employee as a reward for securing a contract.
  3. An employee might have an undisclosed interest in a company potentially biasing negotiations.
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11
Q

What is computer fraud? (1)

A

The use of information technology resources to commit or conceal a criminal offence.

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12
Q

What does computer fraud include? (5)

A
  1. Financial fraud.
  2. Sabotage of data/ networks.
  3. Theft of private information.
  4. Outside system attacks eg DOS.
  5. Unauthorised access by insiders eg misuse of internet access or using malicious software.
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13
Q

What is false accounting? (1)

A

Manipulating financial reports to present the organisation’s results in a better light than in reality.

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14
Q

What are the main types of fraud? (4)

A
  1. False accounting.
  2. Theft.
  3. Third party.
  4. Computer fraud.
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15
Q

What are examples of false accounting? (3)

A
  1. Obtaining external financing by falsely improving results.
  2. Covering up theft or losses by false accounting.
  3. Creating fake customers.
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16
Q

What are examples of theft? (2)

A
  1. Direct theft eg of assets, cash etc.
  2. Falsifying timesheets or expense claims.
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17
Q

What are examples of third party? (3)

A
  1. Customers ordering goods with no intention of paying for them.
  2. Suppliers paying employees rewards eg for securing them a contract.
  3. Collusion either customers to lower prices or raise fake credit notes.
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18
Q

What are examples of computer fraud? (3)

A
  1. Hacking or gaining unauthorised access to a system.
  2. Delivering goods with a lower quality then advertised.
  3. Disguising a transaction’s true nature by manipulating data.
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19
Q

What do fraud investigations often reveal? (12)

A
  1. Credits notes issued for inadequate reasons.
  2. Inventory losses accepted without investigation.
  3. Suppliers insist on only dealing with 1 employee.
  4. Petty cash discrepancies are not investigated or are written off.
  5. Company assets aren’t checked against a fixed asset or stock register.
  6. Payroll isn’t checked by department heads.
  7. Inadequate balance sheet reconciliations.
  8. Unusually high levels of purchases at the YE.
  9. Employee expenses claims aren’t checked and authorised by managers.
  10. Managers say “everyone knows about it” for petty fraud.
  11. Invoices from some suppliers seem high considering the goods/ services provided.
  12. Management and supervision are remote from those they control.
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20
Q

What are the implications if fraud is discovered and addressed? (3)

A
  1. Negative publicity can damage the organisation affecting public perception and consumer confidence.
  2. Facts could come out in a court case effecting customers and suppliers eg may disengage.
  3. Fraudsters may be arrested and could face prison time.
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21
Q

What are the implications of money in stolen from the business? (2)

A
  1. Profits will be lower meaning a lower return to shareholders.
  2. If working capital is reduced the business may struggle to operate effectively.
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22
Q

What are the implications if the organisation’s SOFP is misrepresented, enhancing results? (3)

A
  1. Too much of the profits may be paid to shareholders.
  2. Investors making decisions on inaccurate information may not achieve the expected returns.
  3. Suppliers may extend credit whilst being misled about the organisation’s finances.
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23
Q

What are the implications if the organisation’s SOFP is misrepresented, understating results? (3)

A
  1. Access to loans may be restricted where assets are under valued.
  2. The company’s market share might fall.
  3. Returns to investors may be unnecessarily reduced.
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24
Q

Fraud is more likely to occur in companies with: (16)

A
  1. Domineering management with no oversight.
  2. High staff turnover rates.
  3. Long service staff.
  4. Chronic understaffing in key areas.
  5. Frequent change of legal advisers, auditors or prof advisers.
  6. Reiteration based on company performance.
  7. Inadequate segregation of duties.
  8. Lack of effective procedures in HR, credit control, accounts, purchasing etc.
  9. Management frequently override internal controls.
  10. Frequent transactions with related parties.
  11. Mismatch between profitability and cash flow.
  12. Excessive pressure to meet targets.
  13. Personnel not required to take holiday.
  14. An employee on leave doesn’t have their work covered.
  15. Inadequate responses to queries eg from management, suppliers, auditors etc.
  16. Lack of common sense controls eg not changing passwords.
25
Q

What are the key ways of uncovering fraud? (1)

A

By performing frequent control checks eg inventory counts, cash counts etc.

26
Q

What are signs of fraud? (3)

A
  1. Late customer payments.
  2. Ageing customer balances.
  3. Incomplete audit trails etc.
27
Q

What is risk management? (1)

A

A tool for helping tackle potential fraud.

28
Q

What does risk management include? (6)

A
  1. Risk identification= produce a list of risk items.
  2. Risk analysis= assess the loss probability and magnitude for each item.
  3. Risk prioritisation= a ranked order of risk items.
  4. Risk management planning= decide how to address each item eg avoiding, transferring or absorbing the risk.
  5. Risk resolution= eliminating or resolving the risk.
  6. Risk monitoring= tracking risk resolution progress and taking corrective actions.
29
Q

What is the method risk analysis? (1)

A

Identifying the asset, measuring the risk and determining the vulnerability.

30
Q

What is the organisation at risk of, other than fraud? (8)

A
  1. Malicious attacks.
  2. User errors.
  3. Natural disasters.
  4. System interruptions.
  5. Loss of customer confidence.
  6. Disclosure of sensitive information.
  7. Losing assets.
  8. Data integrity being compromised.
31
Q

What are the guidelines when grading a level of risk? (5)

A
  1. The more valuable an asset the more likely it will be stolen.
  2. If frauds have occurred in the past they are more likely to reoccur.
  3. Cash businesses are both risk as they’re easier to steal from.
  4. Complex accounting environments are more prone to fraud as fewer people understand the system.
  5. Weak controls encourage fraud as there’s less chance of it being discovered.
32
Q

How would a risk matrix be laid out? (1)

A
33
Q

What are the responses to risks and how would they look in a matrix? (5)

A

Transfer, avoid, reduce or accept.

34
Q

What does it mean to transfer a risk? (1)

A

The risk is transferred wholly or partly to a 3rd party, appropriate for high impact events either low probability eg insurance for damage or theft.

35
Q

What does it mean to avoid a risk? (1)

A

High impact high probability events are better to avoid eg not investing or withdrawing completely.

36
Q

What does it mean to reduce/ mitigate a risk? (2)

A

Risks are reduced by minimising exposure in an area or reducing the adverse affects.

This id appropriate for events with low impact but high probability eg CCTV or security to prevent theft.

37
Q

What does it mean to accept a risk? (2)

A

You accept that the risk will occur and decide to deal either the consequences.

Usually when the adverse effect is minimal so low impact low probability eg a constant risk of rain wouldn’t be insured against.

38
Q

What are the key steps to minimise a risk? (3)

A
  1. Understand why it occurs.
  2. Identify areas at risk.
  3. Implement procedures to protect vulnerable areas.
39
Q

The prerequisites for fraud are motive, dishonesty and opportunity.

What is the motive and how can it be prevented? (2)

A

Motive is usually job dissatisfaction eg inadequate pay, passed over for promotion etc.

Prevented by good employment conditions (pay, working hours), instant dismissal where appropriate and sympathetic grievance procedures.

40
Q

The prerequisites for fraud are motive, dishonesty and opportunity.

How can dishonesty be prevented? (2)

A

Prevented by scrutiny of staff eg checking employee references.

It can be reduced in a culture of strict disciplinary procedures and moral leadership by management.

41
Q

The prerequisites for fraud are motive, dishonesty and opportunity.

How can opportunity be prevented? (2)

A

Prevented by segregation of duties, documentation controls (signatures), physical asset security controls, computer input and output controls etc.

There should also be controls covering audit trails, file access logs etc.

42
Q

Fraud prevention is split into prevention and deterrence.

What is fraud prevention? (2)

A

Ensure opportunities are minimised.

Examine all key systems and view them with the mindset of a fraudster to expose flaws so that the company can add controls.

43
Q

Fraud prevention is split into prevention and deterrence.

What is fraud deterrence? (2)

A

Ensuring that potential fraudsters believe their fraud will be discovered and they will be caught.

Whistleblowers must believe they will be protected.

44
Q

What are examples of fraud prevention controls? (11)

A
  1. Credit notes over a certain amount must be authorised by management.
  2. Inventory write downs (decreasing inventory due to falling market value) must be investigated and authorised.
  3. Balance sheet accounts must be reconciled and the recs reviewed.
  4. Assets must be regularly checked.
  5. Sick leave must be controlled and monitored.
  6. Goods must leave the site with a despatch note.
  7. Segregation of duties.
  8. Access to sensitive areas are restricted.
  9. Employee must take holiday and their work must be covered.
  10. Employee expense claims require authorisation before payment.
  11. New employee references must be checked.
45
Q

What are examples of fraud deterrence controls? (5)

A
  1. Internal controls and audits.
  2. Management review/ change of management.
  3. Whistleblowers or anonymous tips.
  4. External audits.
  5. Access controls eg CCTV.
46
Q

How is fraud graded? (3)

A
  1. High= effects are serious and will damage profit and liquidity.
  2. Moderate= effects are significant but can be dealt with internal or by police eg theft, collusion.
  3. Low= effects are insignificant eg petty theft.
47
Q

What areas is fraud likely to affect? (6)

A
  1. Cash payments/ receipts.
  2. SL or PL.
  3. Expenses.
  4. Inventory.
  5. Payroll.
  6. Fixed asset purchases.
48
Q

What does a risk matrix show? (6)

A
  1. Areas at risk.
  2. Details of the type of fraud.
  3. Role of any employees involved.
  4. Any 3rd parties involved through collusion.
  5. Likelihood of fraud.
  6. Impact of fraud.
49
Q

An example of a risk matrix:

A
50
Q

What is a fraud ethics policy? (1)

A

The policy is intended to show the company’s desire to be open and honest in all business dealings.

51
Q

What should a fraud ethics policy include? (5)

A
  1. Values and behaviour= specifically define what is acceptable and what is fraud.
  2. Employee responsibilities= personal interest in other companies should be avoided (conflicts of interest).
  3. Reporting= employees must report gifts received.
  4. Confidentiality= information must not be disclosed or used for personal benefit.
  5. Response= it must state that all suspicions and reports of fraud will be taken seriously.
52
Q

What is a fraud contingency plan? (1)

A

It enables the company to undertake an investigation that meets it’s objectives and protects it’s interest.

53
Q

What should a fraud contingency plan include? (4)

A
  1. Identify fraud risks in each area eg management, employees, 3rd parties etc.
  2. Implement appropriate controls.
  3. Determine who will lead the investigation as well as the team’s powers and objectives.
  4. Decide on his to work with the police and handle publicity.
54
Q

What are the ways a company could react to fraud? (2)

A
  1. Some companies will only want the money returned and the matter kept private.
  2. Some companies want actions taken against perpetrators and the money recovered.
55
Q

Why is the treatment of a fraud case important? (1)

A

Mishandling suspicion and evidence could damage the company’s finances and reputation.

56
Q

What is the most important information to a fraud case? (1)

A

The information that first aroused suspicion is essential and can’t be destroyed, altered or removed from the company’s control.

57
Q

Who handles the different stages of a fraud investigation? (3)

A

The investigation usually starts with company personnel, external investigators or forensic accountants.

Private organisations and forensic specialists might be used to establish and assess the facts.

Information is then passed to the police for a criminal prosecution.

58
Q

Why is a carefully managed media strategy important? (2)

A

Internal and external publicity must be managed so information is kept on a need to know basis.

A media strategy helps to deflect criticism and concerns about the organisation’s stability.

Internal Systems (9 decks)

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