THE CORPORATE CON: INTERNAL FRAUD AND THE AUDITOR

Transcription

1 THE CORPORATE CON: INTERNAL FRAUD AND THE AUDITOR GLOBAL HEADQUARTERS THE GREGOR BUILDING 716 WEST AVE AUSTIN, TX USA

2 TABLE OF CONTENTS I. INTRODUCTION Video Supplement... 1 Course Objectives and Overview... 1 Definition of Fraud... 2 Elements of Fraud... 2 Types of Victims... 3 Fraud Statistics... 3 Profile of Fraud Offenders... 4 Video... 5 Review Questions... 6 II. FUNDAMENTALS OF FRAUD Legal Elements of Fraud... 9 Criminal Versus Civil Fraud... 9 Subclassification of Internal Fraud Schemes Misappropriation Stages Types of Concealment Detecting Fraud Tips and Complaints Weaknesses in Internal Controls Video Behavioral Changes Lifestyle Changes Video Review Questions III. FRAUD AUDITING METHODOLOGY Fraud Auditing Auditing Versus Fraud Examination Fraud Theory Analyzing Available Data Creating a Hypothesis Testing the Hypothesis Refining and Amending the Hypothesis Steps in Fraud Examination Document Examination Neutral Third-Party Witnesses Corroborative Witnesses Co-Conspirators Potential Suspect Elements of Fraud Auditing The Environment The Accounting System Various Detection Techniques Financial Statements Video i

3 III. FRAUD AUDITING METHODOLOGY (CONT.) Net-Worth Methods Review Questions IV. AUDITORS RESPONSIBILITIES Introduction Certified Fraud Examiners Responsibilities Help Resolve Allegations of Fraud Obtain Evidence Take Statements Write Reports Testify to Findings Assist in the Detection and Prevention of Fraud External Auditors Responsibilities AU Section 240 Consideration of Fraud in a Financial Statement Audit PCAOB Auditing Standard No. 5 An Audit of Internal Control over Financial Reporting That Is Integrated with an Audit of Financial Statements PCAOB Auditing Standard No. 3 Audit Documentation AU Section 230 Audit Documentation Internal Auditors Fraud-Related Responsibilities Standard 1210 Proficiency Standard 1220 Due Professional Care Standard 2060 Reporting to Senior Management and the Board Standard 2110 Governance Standard 2120 Risk Management Standard 2130 Control Standard 2210 Engagement Objectives The IIA s IPPF Practice Guide: Internal Auditing and Fraud Review Questions V. CASH SCHEMES Introduction Skimming Voids and Under-Rings Swapping Checks for Cash Alteration of Cash Receipts Documentation Fictitious Refunds and Discounts Journal Entries Kiting Video Cash Fraud Detection Methods Bank Reconciliations Cut-Off Statements Surprise Cash Counts Customer Complaints Altered or Missing Documents Fictitious Refunds or Discounts ii

4 V. CASH SCHEMES (CONT.) Journal Entry Review Review and Analysis of Gross Sales and Returns and Allowances Analytical Review Deposit Dates Cash Advances Voids and Refunds by Employee Identification Cash Fraud Prevention Methods Segregation of Duties Assignment Rotation and Mandatory Vacations Surprise Cash Counts Review Questions VI. ACCOUNTS RECEIVABLE SCHEMES Introduction Lapping Fictitious Accounts Receivable Old or Written-Off Accounts Receivable Borrowing Against Accounts Receivable Video Accounts Receivable Fraud Detection Matching Deposit Dates Confirmations Accounting Cut-Off Analysis Trend Analysis on Written-Off Accounts Receivable Tracking System Accounts Receivable Fraud Prevention Segregation of Duties Lock-Box Arrangements Objective, Sales-Based Compensation Plans Review Questions VII. INVENTORY SCHEMES Introduction Theft of Inventory Larceny Video Appropriating Inventory for Personal Use (Theft) Theft of Scrap Proceeds Charging Embezzlements to Inventory Video Inventory Fraud Detection Statistical Sampling Physical Inventory Counts Analytical Review Computer-Generated Trend Analysis Inventory Fraud Prevention Proper Documentation iii

5 VII. INVENTORY SCHEMES (CONT.) Segregation of Duties Video Independent Checks Physical Safeguards Review Questions VIII. PURCHASING SCHEMES Introduction Fictitious Invoices Overbilling Schemes Checks Payable to Employees Conflicts of Interest Detecting Purchasing Schemes Analytical Review Statistical Sampling Vendor or Outside Complaints Site Visits and Observation Preventing Purchasing Schemes Education Compensation Other Measures Review Questions IX. INVESTMENT AND FIXED ASSET SCHEMES Introduction Investments Detecting Investment and Fixed-Asset Schemes Investments Fixed Assets Preventing Investment and Fixed Asset Schemes Custody of the Assets Approval to Sell or Dispose of Assets Control Over Physical Disposition of Assets Receipt of Sale Proceeds Periodic Physical Inspections Review Questions X. PAYROLL AND PERSONAL EXPENSE SCHEMES Introduction Payroll Fraud Ghost Employees Falsified Hours and Salary Schemes Commission Schemes Video Video Detecting Payroll Schemes Independent Payroll Distribution iv

6 X. PAYROLL AND PERSONAL EXPENSE SCHEMES (CONT.) Analysis of Payee Address or Accounts Screening for Duplicate Social Security Numbers Overtime Authorizations Detecting Commission Schemes Analysis of Deductions from Payroll Checks Preventing Payroll Schemes Segregation of Duties Video Periodic Review and Analysis of Payroll Personal Expense Reimbursement Detecting Personal Expense Schemes Review and Analysis of Expense Accounts Detail Review of Expense Reimbursements Preventing Personal Expense Schemes Strong Ethics Policy Detailed Expense Reports: Submission and Review Video Review Questions XI. BRIBERY AND CORRUPTION SCHEMES Introduction Bribery Illegal Gratuity Collusion Conflict of Interest Bribery and Corruption Schemes Kickbacks Gifts and Gratuities Methods of Making Illegal Payments Video Detection of Bribery and Corruption Schemes The Corrupt Recipient The Corrupt Payer Review Questions XII. THEORY OF FRAUD PREVENTION Introduction The Cressey Study Pressure Opportunity Rationalization Minimizing Pressures Have an Open-Door Policy Management s Attitudes Employee Support Programs Minimizing Opportunities Management Oversight v

7 XII. THEORY OF FRAUD PREVENTION (CONT.) Job Rotation Proactive Audit Policy Well-Defined and Understood Fraud Reporting Program Minimizing Rationalizations An Educational Program Written Ethics Policy Dishonest Acts Will Be Punished Video Create a Low-Fraud Environment Review Questions XIII. FRAUD ASSESSMENT QUESTIONING TECHNIQUES Introduction Questions and Responses Review Questions XIV. PRACTICAL PROBLEMS Practical Problem Practical Problem Practical Problem Practical Problem Practical Problem Practical Problem Practical Problem XV. APPENDIX A: SAMPLE FRAUD POLICY XVI. APPENDIX B: FRAUD RISK CHECKLIST XVII. APPENDIX C: VIDEO TRANSCRIPTS XVIII. SOLUTIONS TO REVIEW QUESTIONS I. Introduction II. Fundamentals of Fraud III. Fraud Auditing Methodology IV. Auditors Responsibilities V. Cash Schemes VI. Accounts Receivable Schemes VII. Inventory Schemes VIII. Purchasing Schemes IX. Investment and Fixed Asset Schemes X. Payroll and Personal Expense Schemes XI. Bribery and Corruption Schemes XII. Theory of Fraud Prevention XIII. Fraud Assessment Questioning Techniques vi

8 XVII. SOLUTIONS TO PRACTICAL PROBLEMS Practical Problem Practical Problem Practical Problem Practical Problem Practical Problem Practical Problem Practical Problem XX. FINAL EXAMINATION... E-1 XXI. INDEX... I-1 vii