2019/8/2 Topic 13 : Frauds 2019/8/2 Week 1

Errors, Irregularities And Frauds 2019/8/2 Errors, Irregularities And Frauds Errors : Careless and unintentional Mistakes, misstatements, omissions or non-disclosures Irregularities : Carefully-executed and intentional Use of deception to obtain financial advantages Resulting in misleading financial communications Frauds : Synonymous with irregularities In particular, involving criminal deception Typical examples of management frauds and employee frauds 2019/8/2 Week 1

Management Frauds Versus Employee Frauds 2019/8/2 Management Frauds Versus Employee Frauds Impact of management frauds : Usually more far reaching for four reasons Reason One : Authority over resource utilization and money transfer => substantial amount Reason Two : Authority to override procedures => difficult to detect/stop Reason Three : Greater access to confidential information => more opportunities Reason Four : More interfaces with outsiders => easier to corroborate with outsiders 2019/8/2 Week 1

Factors Leading To Unethical Behaviours 2019/8/2 Factors Leading To Unethical Behaviours Pressures Mostly >> financial pressures that are non-shareable Sometimes >> non-financial pressures Opportunity Usually associated with weaknesses in internal controls Unnecessary access to assets of cash value Difficulty of detecting fraudulent activities Rationalization : Finding excuses Absence of avenues for alleviating financial pressures Unfair promotion system….. 2019/8/2 Week 1

Fraud Prevention And Detection 2019/8/2 Fraud Prevention And Detection Eliminating pressures Addressing financial and non-financial ones Open-door policy Competitive employment terms Improving working environment Eliminating opportunities Improving internal controls and system reviews Watching for fraud symptoms or red flags Monitoring employees with internal audit... Eliminating rationalization Employing better people and promoting communication Developing an ethical corporate culture and enforceing a code of conduct... 2019/8/2 Week 1

Roles Of Professional Accountants In Fraud Prevention And Detection 2019/8/2 Roles Of Professional Accountants In Fraud Prevention And Detection HKSA Statement 3.271 No responsibility to prevent fraudulent activities in their clients Auditor’s responsibility to detect frauds Substantive tests performed on the debtor ledger Analytical review procedures to detect unusual transactions Compliance tests performed on purchase order processing 2019/8/2 Week 1

Common Malpractices In Accounting And Finance Functions 2019/8/2 Common Malpractices In Accounting And Finance Functions Red flags e.g. poor security over cheques, frequent management overrides, last-minute payment requests, ghost employees, large number of adjustments, unusual endorsements on cheques… Common malpractices e.g. accepting advantages for early payments and late collections, reimbursing personal or fictitious expenses, misuse of cheques, teeming and lading ... Preventive measures e.g. setting up policies and procedures for payments, collections, credit and reimbursements; random and independent checks, regular review of records, suspense accounts ... 2019/8/2 Week 1

Common Malpractices In Purchasing Function 2019/8/2 Common Malpractices In Purchasing Function Red flags e.g. close tender bids, unusual location of suppliers, invoice claims just under approval limit, small suppliers for wide range of services, fictitious suppliers and customers, duplicate payments, supplier complaints ... Common malpractices e.g. accepting advantages for disclosing information or placing orders, setting up bogus firms, acquiring goods for personal use … Preventive measures e.g. setting up policies and procedures for credit-checking and appointing suppliers, random and independent checks on quotations/tenders and details of owners/shareholders, regular review of records for discrepancy from purchase orders, complaints ... 2019/8/2 Week 1

Common Malpractices In Inventory/ Stock Control Functions 2019/8/2 Common Malpractices In Inventory/ Stock Control Functions Red flags e.g. discrepancies between book and stocks, abnormal stock turnovers, poor segregation of duties, substantial amount of unexplained adjustments to inventory balances... Common malpractices e.g. receiving advantages for non- or short deliveries and accepting substandard goods, anomalies with stock loss, stealing goods by writing-off ... Preventive measures e.g. segregation of duties or purchasing and cargo receipt, setting up policies and procedures for records keeping and stock write-offs, checks, stocktakes and record reviews ... 2019/8/2 Week 1