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ALBRECHT, ALBRECHT, & ALBRECHT

FRAUD EXAMINATION

Proactive Approaches to Detecting Fraud


CHAPTER 6

Learning Objectives
1. Explain the importance of proactive fraud detection. 2. Describe the role of commercial datamining software plays in detection. 3. List the advantages and disadvantages of data mining and digital analysis.
4. Recognize Benfords Law.

Learning Objectives
5. Understand inductive fraud detection. 6. Identify how fraud is detected by analyzing financial statements.

How is the Case of Mr. Hamanaka Typical of Most Frauds?

It started small and grew much larger!

Match Terms and Definitions.


Inductive fraud detection Deductive fraud detection Commercial data-mining software Benfords Law
Determining the types of fraud that can occur then query to see if they exist Proactively searching for fraud without determining the type of fraud to look for A mathematical algorithm that predicts the percentage a digit will occur Commercial software used to detect patterns in data

Differentiate Between Detecting & Investigating Fraud. Detection


Discovery of Fraud Answers the Question: Does a fraud exist?

Investigation
Preceded by Detection Proving a Fraud Answers the Questions: How? Who? Why? What? Where? When a fraud took place?

Explain Data-Mining as a Means of Detecting Fraud.


ACL- Audit Command Language
Looking for Anomalies in Databases Difficulty Because ACLs Are Limited in What They Can Handle The Result Is They May Identify Thousands of Symptoms Because of Their Limitations

Review How Benfords Law Works.


Examines the Frequency
of Digits Appearing

in a Database of
Invoice #s or Amounts

0-9 Do Not Appear


10% Each

List Disadvantages of Benfords Law?


Looks at a Large Company as a Whole, May Not Show Problems With Some Individual Vendors
Not Precise

Broad Identification of Symptoms Does Not Zero in on Perpetrators

What is the 5 step Process for Inductive Fraud Detection?


1. Understand the Business
2. Understand the Types of Fraud that Occur in this Business 3. Understand the Symptoms these Types of Fraud Create 4. Use Databases & Information Systems to Search for Symptoms 5. Follow Through with Investigation to Determine if Fraud Exists or Not

Compare the 3 Approaches.


Commercial Data Mining Packages are least costly, but have limited usefulness. They provide excessive symptoms, but are easy to use and modify.

Compare the 3 Approaches.


Statistical analysis provides lots of symptoms and is very useful for discovering vendor kickback frauds.

Compare the 3 Approaches


The Inductive Approach is the most expensive to use.

Summarize the Process Which Results in Financial Statements.


Economic Transaction Produces Journal Entry Posted Financial Statements Analysis Effects Investor or Creditor Decisions

Source Documents Analysis

General Ledger Summarized

What Effect Does the Size of the Fraud Have on the F/S?
Small frauds are unlikely to affect F/S, usually detected when examining source documents Large frauds effect F/S, detected during analysis of unexplained changes in F/S

Explain How Revenue Affects the Companys Accounts.

Accounts Receivable

Revenue
Cost of Goods Sold

If Sales Increase Then

Inventory

How Can You Convert Balance Sheets & Income Statements to Change Statements?
Compare Calculate Key Account Ratios Compare Balances from from Period to Period to Period Period Perform Horizontal Analysis Perform Vertical Analysis

Match Ratio to Name.


Current Quick Test A/R Turnover CA Inventory Average A/R Current Assets Current Liabilities

Sales Average A/R


365 Days A/R Turnover

Days in Receivables

Match Ratio to Name.


Receivables % Bad Debt Expense Average A/R 365 Days Inventory Turnover Cost of Goods Sold Average A/R Accounts/Receivable Total Assets

Bad Debt %
Inventory Turnover

Days in Inventory

Match Ratio to Name.


Cost of Goods Sold Percent
Inventory Percent Property, Plant & Equipment Percent Sales Return Percent

Cost of Goods Sold Total Sales


Sales Returns Total Sales Inventory Total Assets

Sales Ave. Property Plant & Equipment

Match Ratio to Name.


Debt to Equity Debt Percentage

Total Liabilities Total Assets


Net Income # Share of Stock Outstanding

Profit Margin Days in Receivables

Total Liabilities Total Equity Net Income Net Sales

Describe How to Perform Vertical Analysis on:


An Income Statement A Balance Sheet

Describe How to Perform Horizontal Analysis on:


An Income Statement A Balance Sheet

What Questions Should Asked When Using a Statement of Cash Flows to Detect Fraud?
Are there any unexpected changes in cash?
Did A/R go up or down? Why? Why did inventory go up or down?

Statement of Cash Flows


From Investments From Earnings From Borrowings and Stock Issuances

Cash Flows
Cash Balance

Cash Flows
To Operations For Investments To Pay Off Loans Dividends

Discuss the Use of Software for Detecting & Identifying Fraudsters.

Difficulty of the List Information - Information can be in multiple formats Fuzzy Logic

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