Define fraud
deprivation by deceit – the intentional misstatement or misappropriation of assets by an individual or group of individuals
Who does the responsibility for prevention and detection of fraud lie with?
Management and those charged with governance (the board)
What are the two forms that fraud takes
1) removal of funds of assets
2) intentional misrepresentation of the financial position of the company
Examples of fraud: removal of funds or assets
- Theft of cash or inventory
- Payroll fraud
- Teeming and lading
–misallocation of recipts to a customer account to hide theft of earlier receipts - Fictitious customers
- Collusion with customers/suppliers
Examples of fraud: interntional misrepresentation of the financial position of a company
- Overvaluation of the inventory
- Not writing of irrecoverable debts
- Fictitious sales
- Manipulation of year end effects
- Understating expenses
- Manipulating depreciation
What are circumstances under which fraud is likely to arise in a company
- Disreputable employees, lack of ethical leadership, poor cultural influences
- Lack of supervision or controls or security
- Poor rewards,
- Opportunities for collusion
Why are external auditors concerned with fraud?
raud can cause misstatements in financial statements if it exists.
auditing standards require that they should be wary of fraud and maintain an attitude of professional scepticism throughout the audit
Implication of fraud for the organisation
- Loss of assets, reputation, privacy, morale
- Paranoia
- Increase security costs and restriction of privileges
How should the external auditor approach fraud
the EA should consider areas in which the financial statements might be susceptible to material misstatement due to fraud, including how frauds might occur and be alert for evidence that it may be taking place
What would an external auditor do if they detect a fraud and the matter is in the public interest
Auditor could consider breaching their duty of client confidentiality by reporting the matter to the relevant authority.
Take legal advice first - v serious matter
What would an external auditor do if they detect a fraud
extend their testing on that area and then determine the need to modify the audit report
The auditor must also make appropriate reports to:
1) Audit Commitee
2) Shareholders
What would an external auditor do if they detect a fraud that results in money laundering
to avoid prosecution for ‘failing to report’
- accountant must report to the firm’s MLRO who will make a report to the National crime agency if needed
List of control activities that help the company prevent fraud
1) Authorisation
2) Physical controls
3) Segregation of duties
4) Information processing
5) Documenting
What is the main method for ensuring neither fraud nor errors occurs?
by having sound internal control system
Control activities: Authorisation
approval of transactions by a suitably responsible official
Control activities: Physical controls
restricting access to physical assets such as cash or inventory and accounting records
Control activities: Segregation of duties
assignment of roles/responsibilities within a process to diff people
Control activities: Information processing
arithmetic and accounting controls such as checking the arithmetical accuracy of accounting records or performing account reconciliation
Control activities: Documenting
what procedures should be followed and whether they have been followed
How to detect whether fraud in the accounting system has occured
Test controls
Carry out substantiative procedures
What are test controls
conduct spot checks to identift the effective implementation of control activities
How do you carry out substantiative procedures
- conduct Performance reviews and compare budget vs actual results
- Compare info produced by accounting system with external evidence, such as bank statements and supplier statements
- Prepare control accounts where transations are recorded in individual accounts and in total
- Reconcile information in the accounting system with external evidence and other internal information
What is a fraud response plan
Sets out a plan of action in case of suspected cases of fraud, theft or corruption
Having a plan may in itself act as a deterraent
What are the roles and duties of individual managers in the fraud detection and prevention process
- Vigilance
- Collective responsibility
- Communications to staff
- Risk assessment
- Cost-benefit analysis
- Culture
- Implement system of strong controls
- Arrange regular audit of controls
- Adopt zero tolerance approach to fraud
