Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Fraud Examination Chapter 5 Recognizing the Symptoms of Fraud

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. To the Student  Chapter 5 is the first of two chapters that deal with fraud detection. Although the act of fraud itself is seldom observed, symptoms and indicators of fraud are often observable. In this chapter, we discuss several fraud symptoms in an attempt to help you recognize when fraud is occurring.  If these fraud symptoms are recognized, many frauds can be detected at an early stage. We share many examples of various real-life frauds and how they could have been detected if the fraud symptoms had led someone to investigate.

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives  Understand how symptoms help in the detection of fraud.  Identify and understand accounting symptoms of fraud.  Describe internal controls that help detect fraud.  Identify and understand analytical symptoms of fraud.  Explain how lifestyle changes help detect fraud.

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Learning Objectives  Discuss how behavioral symptoms help detect fraud.  Recognize the importance of tips and complaints as fraud symptoms.

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Symptoms of Fraud Can be separated into six groups: 1.Accounting anomalies 2.Internal control weaknesses 3.Analytical anomalies 4.Extravagant lifestyle 5.Unusual behavior 6.Tips and complaints

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Accounting Anomalies  Accounting anomalies result from unusual processes or procedures in the accounting system.  Common anomaly frauds involve:  Irregularities in source documents  Faulty journal entries  Inaccuracies in ledgers

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Internal Control Weaknesses  Internal control fraud symptoms include:  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

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Analytical Fraud Symptoms Analytical Fraud symptoms include:  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  *See the book for more

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Extravagant Lifestyles  People’s lifestyles change when they embezzle, example, Kay…  Embezzled $3 million from her employer  Bought a $500,000 or more home  Bought five luxury cars  Filled home with artwork and glass  Bought a boat  Paid cash to have yard landscaped  Served lobster flown in from the east coast

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Unusual Behaviors

Albrecht, Albrecht, Albrecht, Zimbelman © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Tips and Complaints  Complaints and tips are categorized as fraud symptoms  Employees 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.