Chapter 4: Fraud

Jovit G. Cain, CPA

 Fraud
“Any illegal act characterized by deceit,
concealment or violation of trust. These acts are
not dependent upon the threat of violence or
physical force. Frauds are perpetrated by parties
and organizations to obtain money, property, or
services; to avoid payment or loss of services; or
to secure personal or business advantage.
 FRAUD EQUATION

=
+ +

Reason : ( Driving force and/or intention)

Ability : (Presence of technical and other skills)
Access : (Chance to conceal the fraudulent act)
Four Components of Fraud

1. Concealment
2. Opportunity
3. Attraction
4. Motive
 CATEGORIES OF FRAUD
- Known and recorded publicly
- Known and recorded internally
- Undiscovered
 Causes of Fraud: Why Fraud happen?

- Absence of proper control

- Collusion within the department
- Failure to observe control procedures
- Collusion with persons outside department
- Lack of separation of duties
 ROLES TOWARDS FRAUD
PREVENTION AND DETECTION
MANAGEMENT
-Set the tone from the top by having a policy that
fraud will not be tolerated and fraudsters will be
prosecuted.
-Have a fraud mitigation strategy to detect and
deter would be fraudsters.
-Have a fraud response plan setting out exactly
what steps to take if a fraud is reported or
detected.
 ROLES TOWARDS FRAUD
PREVENTION AND DETECTION
INTERNAL AUDIT DEPARTMENT
-Reviewing fraud prevention and detection
processes put in place by management.
-Assisting management to improve those
processes.
-Leading investigations where necessary.
-Liaison with the police.
-Dealing with whistle-blowers
 ROLES TOWARDS FRAUD
PREVENTION AND DETECTION
INTERNAL AUDIT DEPARTMENT
-Reviewing fraud prevention and detection
processes put in place by management.
-Assisting management to improve those
processes.
-Leading investigations where necessary.
-Liaison with the police.
Types of Fraud
A. Theft
B. Bribery and Corruption
C. Forgery
D. Conspiracy
 A. THEFT
- Obtaining property by deception and false
accounting
B. BRIBERY AND CORRUPTION
- Any money, gift or consideration paid or
consideration paid or received as an
inducement or reward for favour or request
from an authority.
 C. FORGERY
- False instrument with the intention that he or
another shall use it to induce someone to
accept it as genuine and by reason of so
accepting it, to do, or not to do some act to his
own or some other’s prejudice.
 D. CONSPIRACY
- Involves unlawful agreement by two or more
persons to carry out an unlawful common
purpose or lawful common purpose by
unlawful means.
 Indicators of Fraud
- Unexplained; Incomparable Data
- Tipp-Ex (Erasing Fluid)
- Unreconciled records
- Rewritten and/or amended documents
- Photocopies substituted for originals
- Lavished lifestyle
- Missing documents
- Complaints from clients or suppliers
 MEANS TO DETECT FRAUD
/ Tip from employees
/ Internal control
/ Anonymous tip
/ By accident
/ External Audit
/ Tip from vendor
/ Internal Audit
/ Tip from customer
/ Notification from law enforcement
 INVESTIGATION FRAUD:
What to do?
- Call the police
- Do nothing
- Issue a formal instruction to staff
- Check the system of internal control
- Instruct disciplinary proceedings
- Suspend the suspect
- Interview the officer in question
- Commence a joint management/ Internal audit
investigation
- Commence an audit investigation
- Commence a management inquiry
 FRAUD INVESTIGATION
AUDIT REPORT FORMAT
1. Executive Summary
2. Introduction
3. Investigation
4. Detailed findings
5. Conclusion and recommendation
6. Appendices
 FRAUD KEY CONTROLS
- Good recruitment procedure
- Supervision
- System of management account
- Up-to-date accounts
- Clear line of authority
- Controlled profit margins
- Good staff discipline procedure
- Management trail
- Good controls over cash income
- Store/equipment control
 FRAUD KEY CONTROLS (2)
- Fraud hotline
- Well-trained and alert management
- Independent checks over work
- Regular staff meetings
- Employee code of conduct
- Good management information system
- Publicized policy on fraud
- Good documentation
- Financial procedure
- Good communication
 FRAUD KEY CONTROLS (3)
- Segregation of duties
- Anti-corruption measures
- Good-all-round systems of control
 Choice Board
Task C:
Task B:
Explain, using a
Task A: Draw a T-chart and graphic organizer, the
then list down the theory behind the idea
Using the acronym F- characteristics of a of ensuring proper
R-A-U-D, describe your 21st century learner on alignment between and
personal views about the left; while your among the lesson
the nature and extent teaching approaches objectives, to the
of “fraud” in internal on the right teaching-learning
auditing. activity, to the
assessment task
 Activity

Task :

Using the acronym R-I-S-K,

describe your personal views
about the nature and extent of
“risk and risk management” in
internal auditing.