ACCT6186

Fraud Auditing

Week 3
Recognizing The Symptoms of Fraud
Symptoms of Fraud
Accounting Anomalies
 Accounting Anomalies
• Common accounting anomaly fraud symptoms involve
problems with:
– Source documents
– Faulty journal entries
– Inaccuracies in ledgers
 Irregularities in Source
Documents
• Common fraud symptoms involving source documents
– Missing documents
– Stale items on bank reconciliations
– Excessive voids or credits
– Common names or addresses of payees or customers
– Increased past-due accounts
– Increased reconciling items
– Alterations on documents
– Duplicate payments
– Second endorsements on checks
– Document sequences that do not make sense
– Questionable handwriting on documents
– Photocopied documents
 Faulty Journal Entries
• Common journal entry fraud symptoms
– Journal entries without documentary support
– Unexplained adjustments to receivables, payables,
revenues, or expenses
– Journal entries that do not balance
– Journal entries made by individuals who would not
normally make such entries
– Journal entries made near the end of an accounting
period
 Inaccuracies in Ledgers
• Two common fraud symptoms relating to ledgers
– A ledger that does not balance; that is, the total of all debit
balances does not equal the total of all credit balances
– Master (control) account balances that do not equal the sum of
the individual customer or vendor balances
Internal Control Weakness
 Internal Control Weaknesses
• Common internal control fraud symptoms
– Lack of segregation of duties
– Lack of physical safeguards
– Lack of independent checks
– Lack of proper authorization
– Lack of proper documents and records
– Overriding of existing controls
– Inadequate accounting system
• Many studies have found that the element most common in
frauds is the overriding of existing internal controls.
Analytical Anomalies
 Analytical Fraud Symptoms
• Analytical fraud symptoms are procedures or relationships that are unusual or too
unrealistic to be believable.
• Common examples of analytical symptoms
– Unexplained inventory shortages or adjustments
– Deviations from specifications
– Increased scrap
– Excess purchases
– Too many debit or credit memos
– Significant increases or decreases in account balances, ratios, or relationships
– Physical abnormalities
– Cash shortages or overages
– Excessive late charges
– Unreasonable expenses or reimbursements
– Excessive turnover of executives
– Strange financial statement relationships
Extravagant Lifestyle
 Extravagant Lifestyles
• Most people who commit fraud are under financial pressure—real or perceived.
• Once perpetrators meet their financial needs, they usually continue to steal, using the embezzled
funds to improve their lifestyles.
• Examples of lifestyle improvements
– Buy new cars
– Buy expensive toys such as boats or recreation vehicles
– Take vacations
– Remodel homes
– Move into more expensive houses
– Buy expensive jewelry or clothes
– Spend more money on food and other day-to-day living expenses
• Very few save the money they steal.
– As they become more and more confident in their fraud schemes, they steal and spend larger
amounts.
– Soon they are living lifestyles far beyond what they can afford.
Unusual Behavior
Behavior Signals of Fraud Perpetrators

15
Tips and Complaint
 Tips and Complaints
• Auditors are often criticized for not detecting more frauds.
• Yet because of the nature of fraud, auditors are often in the worst
position to detect its occurrence.
• As we covered previously, the factors that lead to fraud are depicted
in the fraud triangle.
• These factors consist of perceived pressure, perceived opportunity,
and rationalization.

17 CHAPTER 5
 Tips and Complaints Are Fraud
Symptoms
• Complaints and tips are categorized as fraud symptoms because many
tips and complaints turn out to be unjustified.
– Examples of motivations behind complaints and tips:
• Customers may complain because they feel they are being taken advantage
of
• Vendors may provide a false tip because they are disgruntled because of a
lost contract
• Employee tips may be motivated by malice, personal problems, or jealousy
• Tips from spouses and friends may be motivated by anger, divorce, or
blackmail
• Whenever tips or complaints are received, they must be treated with
care and considered only as fraud symptoms.
 Unreported Knowledge or
Suspicions of Fraud
• In some situations, people are hesitant to come forward
with knowledge or suspicions of fraud.
• Reasons include:
– Some uncertainty that a fraud is taking place
– Fear reprisal for being a whistle-blower
– Intimidation by the perpetrator
– Belief that squealing on someone is wrong
– Not easy to come forward within many organizations
 Reference
• Albrecht, W.S., Albrecht, C.O, Albrecht, C.C, Zimbelman, M.F. (2019).
Fraud Examination. 6th. Cengage Learning. ISBN: 9789814834681.
• Purba, B. P. (2015). Fraud dan Korupsi. Lestari Kiranatama. ISBN:
9786027739581
Thank You