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
