1. FRAUD EXAMINATION ALBRECHT, ALBRECHT, & ALBRECHT
Recognizing the Symptoms of Fraud
CHAPTER 5

2. Learning Objectives
Understand how symptoms help in the detection of fraud.
Recognize and understand accounting symptoms of fraud.
Identify internal controls that help detect fraud.
Identify and understand analytical symptoms of fraud.

3. Learning Objectives Realize how lifestyle changes help detect fraud.
See how behavioral symptoms help detect fraud.
Recognize the importance of tips and complaints as fraud symptoms.

4. Discuss the Symptoms of Fraud.
Red Flags = Danger
Symptons = Fraud
Early Detection Saved

5. List 6 Symptoms of Fraud. 1 = 1 Accounting Anomalies -
Ledger Doesn’t Balance
Analytical Anomalies
1 = 1
Internal Control Weakness - No Vacation

6. Extravagant Lifestyle
List 6 Symptoms of Fraud
Extravagant Lifestyle
Tips & Complaints
Unusual Behavior

7. List Irregularities to Look for in Source Documents?
Missing Documents
“Stale Items” on Bank Reconciliation
Excessive Voids or Credits
Payee Names & Addresses = Customer Names & Addresses
Photocopied Documents
Payee Names & Addresses = Employee Names & Addresses
Past Due A/R
Reconciling Items
Altered Documents
Duplicate Payments
Second Endorsements on Checks

8. Accounting Anomalies Faulty Journal Entries
Inaccuracies in the Ledgers
Ledger doesn’t balance
Master or Control Accounts do not equal the sum of individual customer or vendor accounts

9. Identify Symptoms of Journal Entry Fraud.
Journal entries without support documentation
Unexplained adjustments to receivables, payables, revenues or payables
Journal entries that do not balance
Journal entries made by individuals who would not normal make such entries
Journal entries made near the end of an accounting period

10. Discuss the Inaccuracies of Ledgers
Define a Ledger
A book of accounts
How do you prove the accuracy of a ledger?
A = L + OE or Dr = Cr
What symptoms relate to control accounts?
Dr = Cr
Master account balances do not equal sum of the subsidiary account balances

11. List & Explain Internal Control Weaknesses.
Lack of Segregation of Duties
Lack of Physical Safeguards
Lack of Independent Checks & Reviews
Lack of Proper Authorization
Overriding of Existing Controls
Inadequate Accounting System

12. List Common Examples of Analytical Anomalies. Explain.
Unexplained Inventory Shortages or Adjustments
Deviations from Specifications
Increased Scrap
Excess Purchases
Too Many Debit or Credit Memos
Significant Increase or Decrease in Account Balances
Physical Anomalies
Cash Shortages or Overages
Excessive Late Charges
Unreasonable Expenses or Reimbursements

13. Discuss Questionable Financial Statement Relationships. Explain.
Revenues with Inventory
Revenues with Receivables
Revenues with Cash Flows
Inventory with Payables
Volume with Increase Cost Per Unit
Volume with Scrap
Inventory with Warehousing Costs

14. Learn to Observe Not Just See
Accounting Anomalies
Things Look Strange
Patterns Don't Match
Learn to Observe Not Just See

15. Comment on Extravagant Lifestyles.
Financial Pressure
Greed
Spend What They Steal
Significant Improvement in Lifestyle
Flaunt Their “Wealth”
Living Way Beyond Their Legal Means

16. What is the Chain that Leads to Unusual Behavior?
Guilt
Fear
Stress
Behavior
Changes

17. List Some Unusual Behaviors.
Insomnia
Increase Drinking
Drug Abuse
Unusually Irritable & Suspicious
Unable to Relax
Lack of Pleasure in Former Pleasing Things
Inability to Look People in the Eyes
Unusually Belligerent
Working Standing Up
Sweating
Increased Smoking
Fear of Getting Caught

18. Review the Fraud Triangle.

19. Tips & Complaints Term Match
Steps Taken by
Perpetrator to
Hide the Fraud
Theft
Converting Stolen
Assets to Cash &
Spending the Cash
Concealment
Actually Taking
Cash, Inventory,
Information or
Other Assets
Conversion

20. Discuss Why More Frauds Are Discovered through Tips & Complaints?
Auditors Focus on Paperwork, Systems & Information
Fellow Employees Notice Lifestyle Changes
Complaints & Tips Are Only Symptoms - the Actual Investigation Can Show if a Fraud Exists

21. Why Do Employees Hesitate to Report Fraud Symptoms?
They’re Not 100% Sure a Fraud Is Occurring
They Don’t Want to Wrongly Accuse Someone
They Have Heard Horror Stories About What Happens to Whistle Blowers
Intimidation by Fraudsters
Condition Against Squealing

22. Discuss the Use of Hotlines.
Hotlines are “800” Phone Numbers Where Employees Can Provide Anonymous Tips & Information
Sometimes Set Up by the Company or Contracted with a Service or Organization Like ACFE
Run Hot & Cold

23. Match Terms Accounting Anomalies
Weaknesses in control environment, accounting system or control activities
Analytical Anomalies
Theft, Concealment, Conversion
Elements of Fraud
Relationships, procedures or events don’t make sense
Internal Control Weakness
Inaccuracies in journal entries, ledger, etc.