Exam 2 Flashcards
Data-driven fraud detection
using data, usually through the mining of those data, to identify patterns, anomolies, etc. to find possible fraud symptoms
Accounting errors
Statistical analysis
is a component of data analytics. Statistical analysis involves collecting and scrutinizing every data sample in a set of items from which samples can be drawn. A sample, in statistics, is a representative selection drawn from a total population
Open Database Connectivity (ODBC)
A connector between the front-end analysis and the back-end corporate database
Data warehouse
a repository for data
Benford’s law
the first digit of random data sets will begin with a 1 more often than with a 2, a 2 more often than with a 3, and so on
Digital Analysis
the art of analyzing the digits that make up number sets
Stratification
the splitting of complex data sets into groupings
Summarization
runs one or more calculations on the subtables to produce a single record representing each subtable
Time trend analysis
analysis of prices, quantities, costs, or other values over time
Fuzzy matching
a technique that allows for searches to be performed that will find matches between some text and entries in a database that are less than 100 percent identical
Vertical analysis
compares numbers in the statement from one period to the next
aka calculates percent of total for each line item and look for anomalies. Compares everything in relation to total income.
Horizontal analysis
key financial statement ratios are calculated and changes in these ratios from period to period are compared.
aka time trend analysis
Types of ratios:
- Gross Margin Ratio
- A/R Turnover Ratio
- Profit Margin
- Current Ratio
- Quick Ratio
- Net Profit Margin
What are the 6 data analysis steps?
- Understand the Business
- Identify possible frauds that could exist
- Catalog possible fraud symptoms
- Use technology to gather data about symptoms
- Analyze results
- Investigate Symptoms
Which is the most important step in data analysis?
Catalog Possible Fraud Symptoms
Types of Fraud Symptoms:
Accounting Errors, Internal Control Weaknesses, Analytical Errors, Extravagant Lifestyles, Unusual Behaviors, and Tips and Complaints.
Difference between errors and frauds:
Errors are usually carried throughout the data set, so an auditor can usually see errors using a statistical sample, but frauds are like a needle in a haystack and may only be present in a couple transactions.
When should you use Benford’s law?
Just use it as a sanity check.
Methods for Gathering Data:
- Open Database Connectivity
- Text Import
- Hosting a Data Warehouse
The most important and often overlooked step:
Getting the right data, in the right format, during the right time.
What is the least effective method of financial statement analysis?
Comparing account balances from one period to the next.
Data analysis techniques:
- Outlier investigation
- Time trend analysis
- Fuzzy matching.
Vulnerability Chart
a tool that explicitly considers all aspects of the fraud
Theft act investigation
activities that directly investigate the fraud act
Surveillance
watching or recording the physical facts, acts, and movements, which are part of the theft act of a fraud
Invigilation
a theft act investigative technique that involves close supervision of suspects during an examination period. (generally 2 week period where you also check before and after that period.)
Computer forensics
gathering of electronic evidence
Predication
circumstances to believe fraud has, will, or could occur.
CRC Checksum
a calculation (using encryption algorithms) based on the contents of a disk or file.
helps keep track of documents, and helps prove the authenticity of a document due to hashed values.
Factors to consider when deciding whether or not to investigate fraud:
costs, $ amount suspected, predication, and nature of the fraud.
Ways to gather physical evidence
- confiscating computers is the most common now
Vulnerability Chart components
- Assets that were taken or are missing
- Individuals who had theft opportunities
- Theft investigative methods
- Concealment possibilities
- Conversion Possibilities
- Symptoms observed
- Pressures of possible perpetrators.
- Rationalization of perpetrators
- Key internal controls that had to be compromised for the theft to occur.
Theft Act Investigation Techniques
Surveillance, covert operations, invigilation, obtaining physical evidence, and gathering electronic information.
important to remain unbiased and maintain confidentiality.
Three types of surveillance:
- Stationary/Fixed Point
- Moving or tailing
- Electronic Surveillance.
Various investigative methods
Theft Investigative Methods, Conversion Investigative Methods, Concealment Investigative Methods, and Inquiry Investigative Methods.
What order to interview people during an investigation?
Work from the outside in to narrow in on the suspect.
Four steps to seizing and searching computers:
- Secure
- Clone & CRC
- Search Manually
- Search using automation
Chain of custody:
a record must be kept of when a document is received and what has happened to it since its receipt
Bates Number
used by attorneys involved in litigation to track all documents
Discovery Sampling:
a form of statistical sampling that allows an auditor to generalize and make inferences from the sample to the population
Sampling Risk
the possibility that the sample will not be representative of the population
Nonsampling risk
to examine a fraudulent check and not recognize it as such
Subpoenas
a written order in the name of the court, requiring a witness to submit to a deposition, give testimony at trial, or report to an administrative body
Document Examination
a specialized form of investigation that applies forensic chemistry, microscopy, light, and photography in making determinations about documents
How to reduce sampling risk?
Get a larger sample size or take a random sample
How to Get Hard-to-Get Documentary Evidence:
- Subpoena
- Search Warrant
- Voluntary Consent.
Rules which must be observed in obtaining documentary evidence:
- Proper chain of evidence
- Marking of evidence
- Organization of evidence
- Coordination
- Photocopies
Four Concealment Investigation Methods:
- Document Examination
- Audits
- Electronic Searches
- Physical Asset Counts
How are most frauds concealed?
Manipulating documents, so remember to mark documents and keep track of them.
Warning signs that a document should be sent to a document examiner:
Alterations or substitutions, Use of two or more colors of ink, abrasions or chemical pen or pencil erasures, disguised or unnatural writings, charred, mutilated, or torn pages, Pencil or carbon marks along the writing lines, Existence of lines made during photocopying, signs of inconsistency or disruption in the continuity of the content, any suspicious appearance or unusual form.
Interview
a question-and-answer session designed to elicit information
Trashing
looking through a person’s trash for possible evidence
Postal Inspectors
investigators who handle major fraud cases involving the use of mail, and they work for the prosecution of offenders who violate postal laws
Opting out
sending written notice to the bank denying the bank the right to sell someone’s personal bank information
Net worth method
based on a person’s assets (things owned), liabilities (debts), living expenses, and income.
Used to discover the amount of unknown sources of funds.
Why are conversion searches performed?
- To determine the extent of embezzlement
- To gather evidence to be used during interrogation.
Federal sources of investigation:
Department of defense, Department of Justice, Federal Bureau of Prisons, the IRS, the Secret Service, the Social Security Administration.
State Sources of information:
State Attorney General, State Prisons, Secretary of State, the DMV, the Department of Vital Statistics, Department of Business Regulation
Local Sources of Information:
County Land Office and Tax Assessor’s Office, the County Clerk, County Sheriff, Local Courts, and Permit Departments.
Credit reporting agencies are of two types:
- File-based credit-reporting agencies, which develop information from their credit files
- Public records and investigative agencies, which gather most of their information through interviews.
Types of information credit reporting agencies maintain:
- Consumer information
- Account information
- Marketing information
- Information on current and former employers.
