1. Learning Objectives LO6 Explain the auditing standards related to external, internal, and governmental auditors’ responsibilities to detect and report frauds, errors, irregularities, and illegal acts. LO7 Describe ways and means to prevent frauds. LO8 Explain the use of extended audit procedures for detecting fraud. LO9 Summarize how PAs can assist in prosecuting fraud perpetrators. 1

2. Fraud Prevention Effective long-run prevention measures are complex and difficult.  they involve the elimination of the causes of fraud by mitigating the effects of motive, opportunity and lack of integrity.  A tightening of internal controls alone is, at best, a short-run solution. LO7 2

3. Managing People Pressures in the Workplace People will experience financial and other pressures.  These cannot be eliminated, but the facilities for sharing them can be created.  Ethics officers can be available to discuss ethical dilemmas faced in the workplace.  Hotlines can be used for anonymous reporting of ethical problems.  An effective long-run prevention is practicing management by caring for people. LO7 3

4. Control Procedures and Employee Monitoring Procedures for recognizing and explaining red flags are important for uncovering frauds early.  Controls should reveal symptoms of fraud cover-ups:  missing documents,  second endorsements on cheques,  unusual endorsements,  unexplained adjustments to inventory balances,  unexplained adjustments to accounts receivables,  odd items on the bank reconciliation,  old outstanding cheques,  customer complaints, or  unusual patterns of deposits in transit. LO7 4

5. Integrity by Example and Enforcement The key to integrity is accountability -- each person must be willing to put his/her decisions in the sunshine.  Many organizations begin by publishing codes of conduct.  Can be effective if the “tone at the top” supports it.  Background checks on prospective employees are advisable.  Fraudsters should be fired and prosecuted.  There is a high rate of recidivism in fraudsters if there has not been prosecution. LO7 5