Fraud Exam 2 mine

Why perform financial statement analysis if it is likely to miss smaller frauds?

it can be done quickly and inexpensively, can be disaggreated into smaller segments

financial statement analysis is often a first procedures used for screening

analytical procedures

involve analyzing account balances and relationships between account balances. computing numbers is not analysis

time trend analysis

compares the activity within an account balance over an extended period of time. (alerts us to a red flag)

horizontal analysis

focuses on changes within an account over a period of years.

vertical analysis

focuses the relationship of accounts within the same period. (% of total assets, % of net sales)

Ratio analysis

allows an investigator to observe relations between two or more accounts.

advantage of ratio analysis

allows an investigator to observe relations between two or more accounts

current ratio

a measure of liquidity

company's ability to pay its current liabilities within a year

CR less than 1 indicates a companies problem to pay short-term debts, decrease= embezzlement

if it is too high it indicates too many resources tied up in unproductive CA like inventory, high ratio = liability concealment

prime indicator that the accounts involved have been manipulated

quick ratio or asset test

exclude inventory

company's ability to pay its current liabilities assuming company does not sell any inventory

provides worst case scenarios

if we could not sell inventory how likely can the company survive

Accounts receivable turnover

measure of how quickly accounts receivable are collected

fictitious sales are significant rate will decrease

why is important that companies manage their accounts receivable?

AR are interest-free loan to customers, not a productive asset

longer a receivable is unpaid the greater the likelihood it will never be paid

inventory turnover

sales activity to the amount of inventory held

number of times a company sells out its inventory during a period

understating COGS= decrease

theft of inventory=increase

higher rate is favorable

average selling period

much longer than industry = overstate/excessive amounts of inventory

shorter selling periods = too little inventory, risks stock outs, concealment of theft

debt to equity

Degree of leverage

proportion of assets financed by debt relative to those by equity

higher = riskier for lenders

net sales to assets

company's net sales relative to the amount of assets used to generate those sales

higher= more efficient in using assets to generate revenue

profit margin (return on sales)

how much of each net sales dollar is left after paying all of the expenses

what is normal depends on industry

gross profit margin

how much sales dollars is left after paying for the inventory sold

normalcy depends on company

grocery= 25%, jewelry=45%

theft=decrease

why is it important to proactively detect fraud?

if a company proactively detects fraud they can reduce the costs and damages caused by fraud. Cheaper to detect in early stages

does not alert possible suspects

identifies possible red flags

what are the differences between anomalies and fraud?

Anomalies are not intentional and do not provide action for legal issues. An anomaly is usually spread throughout a data set. Fraud though is intentional and is hidden.

What are the risks of sampling when searching for fraud?

If an auditor uses sampling they run the risk of looking at a portion of the data that misrepresents the fraud. To best detect fraud and auditor should look at all of the data so they can find the hidden fraud.

What are the advantages of using data analysis software to detect fraud in a data driven approach?

Some of the advantages of data analysis software is that it helps save time for auditors when looking for the "needle in the haystack". It also makes it easier for auditors to search all records in population data. The auditors also don't have to wait for a tip to come into to look at the data for possible fraud either.

What are the advantages of using statistical analysis to detect fraud?

The advantages of using statistical analysis is that you can use it on all databases which provide real time results.

What are the disadvantages of using statistical analysis to detect fraud?

A disadvantage of using statistical analysis to detect fraud is that it leads to a large number of results that are time consuming and they don't focus on the entire population.

What is benford's law

The rule states that the first number of the random data will start with a 1 more often than with a 2. The say with a 2 occurring more often than a 3. It predicts that in the set of data the pattern listen above will match the set of random numbers.

List and describe the steps of the data-driven fraud-detection approach.

Step 1 is to understand the business; an auditor must know the business's process and procedures before analyzing the data. The next step is to identify the possible frauds that could be present in the business by separating the business into separate divisions. Step 3 is to catalog possible fraud symptoms by creating categories like accounting anomalies or internal control symptoms. Step 4 is to gather data about symptoms using technology. This step help to narrow down the data into manageable set of symptoms of fraud. In step 5 results are analyzed to identify the reasons for the symptoms. The last step is to investigate the symptoms to see which symptoms do prove fraud.

How can fraud be detected by analyzing financial statements?

Financial statements are viewed as the summary of a financial transaction that occurred within a certain period of time. They usually only help to detect large frauds. The investigator usually focuses on the unexplained changes and by financial ratios. If a ratio seems to high for the company and industry a closer look might reveal an anomaly or fraud. An investigator can also use vertical analysis to determine the percentages of items on the balance sheet and income statement. Another approach to detecting fraud with analyzing financial statements is by conducting a horizontal analysis. Horizontal analysis converts percentage changes in balance sheet and income statement. This method compares the data from period to period.

What is the significance of unexplained changes in financial statements in detecting fraud?

The significance is that the unexplained changes in financial statements helps investigators determine possible areas of fraud that they must look further into to determine what the cause is.

What are some of the difficulties in trying to correlate customers, vendors, or employees with known problem people?

the erratic formatting, they are complicated to perform, and personal data contains many different variations.

How are theft investigative methods used to investigate suspected frauds?

It allows the investigator to determine specific facts on how the fraud was committed. The different types of theft investigation methods are surveillance, invigilation, and physical evidence. Surveillance uses the senses like hearing and seeing to observe the physical act, facts, and movements of the perpetrator. Invigilance is used to determine if fraud is occurring by using close supervision of suspects while limiting the possibilities for fraud to occur. Physical evidence is used to keep records of inventory by counting to see if it matches what is on the books.

What factors should be considered when deciding whether to investigate a case of fraud?

The first thing that must be done before an investigation can start is to determine if a predication of fraud exist. After predication is established some factors that would help an investigator decided to investigate would be if the strength of the predication seems real and the perceived costs of the investigation. Some other factors include the risks of investigating or not, nature of the fraud, and public exposure.

How does a vulnerability chart help coordinate an investigation of suspected fraud?

A vulnerability chart is used to consider all aspects of the fraud by coordinating the different elements of fraud. The different elements of the fraud are the assets that were taken, individuals who had opportunities to steal and methods of theft investigation. The elements also include possibilities to conceal, observed symptoms, pressures and rationalization of the perpetrators and important internal controls.

What is a surveillance log?

A surveillance log is a detailed record of an investigators observation. The surveillance log includes the time and date of the surveillance, where it occurred, and who the observer was. It should also include each move in detail of what the suspect did.

What is invigilation?

Invigilation is a theft act investigation technique where management creates a strict control environment that must last at least 14 days. Management then compares the records for the company before, during and after the invigilation time. This technique is useful for managers to see if fraud is occurring in the business.

How is physical evidence used to investigate fraud?

In a theft crime, physical evidence can be used to tie the suspect to the act. Physical evidence includes fingerprints, stains, tire marks and a physical stock count. To gather evidence an investigator must analyze assets, inventory, substances, and searching computers.

What are the steps involved in collecting electronic evidence?

There are four steps involved in gathering electronic evidence. The first step is to secure all devices and perform initial tasks that include taking pictures of the computers site and having all legal requirements before obtaining evidence. The second step is to clone the device and calculate a CRC checksum. A CRC checksum is an error detecting code that check to make sure that no raw data was accidentally changed in the process. Step 3 is to search the device manually by looking at common folders such as the documents and pictures folder as well as recycle bin and computer logs. Step 4 is to search the device using automated procedures like keywords.

Why is it important to use investigation techniques that will not arouse suspicion among possible perpetrators?

will cause a perpetrator and other employees to becomes suspicious and nervous. If a suspect becomes aware that they is an investigation they are more likely to stop their fraudulent activities making it harder for you to investigate.

Why is it important to consult legal counsel and human resources before any form of surveillance takes place?

It allows you to make sure that all actions you take are legal and will hold up in a court of law. It will also help you make sure that you will not violate an individual's rights.

What roles does the fourth amendment to the constitution play in cases of fraud investigation?

The fourth amendment helps protect an individual from unlawful searches and seizures. In most cases for a detective or an investigator to have access to a person's belongings they must first get a search warrant from a judge.

What four methods of investigation constitute the fraud triangle plus inquiry approach to investigations?

The four methods of investigation are the theft, concealment, conversion and inquiry. Theft investigative methods include surveillance, invigilation, seizing and searching computers, and physical evidence. Concealment investigative approach includes examination of documents, audits, electronic searches, and physical asset counts. Conversion investigative methods include searching public records, online resources, net worth method. Inquiry investigative approach includes interviews and interrogation as well as honesty testing.

What are the most common ways perpetrators conceal their frauds?

The most common ways perpetrators conceal their frauds is through manipulating documentary evidence and the deliberate deletion of important documentary evidence.

What are the primary aspects of documentary evidence?

The primary aspects of documentary evidence are chain of custody of evidence and the marking of evidence. The chain of custody of evidence is a record of when a document is received and what has happened to it. Marking the evidence is used when a document has been received so that later a person can identify who received the document.

Why is it important to maintain a chain of custody for documentary evidence?

It is important to maintain a chain of custody for documentary evidence because for the evidence to be held in court a proper chain of custody must be maintained. In cases where the chain of custody was not kept an opposing attorney may try and prove that in some way evidence was altered. Detailed records of the chain of custody prevents an attorney from having a judge throw it out.

What programs can help with evidence coordination?

Some programs that can help with evidence coordination are i2 Analyst's Notebook from IBM and Xanalysis Link Explorer. These programs use link analysis to quickly understand complex scenarios and volumes of data in a visual view.

Why is it important to obtain documentary evidence?

It is important to obtain documentary evidence because the documents cannot be cross witnessed, they do not change their story or forget to mention information, they cannot lie under oath and tell an inconsistent story. In court, they are a full proof method of presenting evidence because they represent the truth.

What is the value of documents when conducting a fraud investigation?

In concealment investigation documents are a major part of the investigation because in concealment cases documents are being manipulated and altered. Documents are highly valuable because they are reliable and consistent.

Why is it important to obtain documentary evidence?

It is important to obtain documentary evidence because in a court of law it is reliable and trustworthy. Documentation is trustworthy in the sense that is provides the facts and does not change its story every time you look at it. Documentary evidence is crucial in backing up investigators claims of fraud and can help prove someone is guilty beyond a reasonable doubt.

How can discovery sampling help in obtaining documentary evidence?

Discovery sampling can help in obtaining documentary evidence by giving auditors a generalization and make inferences from the sample. It is also the easiest statistical sampling method an auditor can use. This approach allows auditors to make inferences about a population and helps find unintentional errors.

What are different ways investigators can obtain hard to get documentary evidence?

The different ways that investigators can obtain hard to get documentary evidence is by subpoena, search warrant and by voluntary consent. A subpoena is an order by a court or grand jury that requires the receiver to hand over documents. A search warrant is like a subpoena in that a judge must grant it prior to obtaining evidence. There must be probable cause for a search warrant to be issued. Voluntary consent is either oral or written that can be used to access bank accounts.

methods for theft investigation

surveillance and covert operations

invigilation

physical evidence

fraud triangle

methods for theft investigation

methods for conversion investigations

methods for concealment investigation

methods for concealment investigation

document examination

audits

computer searches

physical asset counts

methods for conversion investigations

public record searches

net worth method

method for inquiry investigaon

interviews and interrogation

honesty testing

what are common ways to investigate conversion of stolen assets?

the most common ways to investigate conversion of stolen assets is by gathering information from federal, state, and local agencies, gather infromation from private sourves like credit-reporting companies, online sources of infor and usin the net worht to analyse zspending infor.

what are financial footprints?

financial footprints are tracks left behind after people enter financial transactions like buying assets.

why is it important to know how perpetrators convert and spend their stolen funds?

it is important to know how perpetrators convert and spend their stolen funds because almost all fraudsters spend their stolen money instead of saving it. Some schemes don't have fraudulent company records therefore focusing on an individual's lifestyle habits can help investigators detect potential frauds

what are the differences between public and private sources of information

public sources of info are easily available to the public through online searches and public records. private sources of information may require an individual to gather search warrants to acquire information or extra further digging methods like trashing.

how do state, federal and local public records assist fraud investigations?

they assist fraud investigators by providing information based on individuals SSN's, places they have lived, information on whether they were convicted previousl of a crime that would not usually be available

how does the internet assist indetermining the net worth of suspected perpetrators

the internet can assist in determining the net worth of suspected perpetrators by information about an inndividuals inheritance, purachase of real esaste, automobile purchases and other relevant activities?

why are net worht calculations so valuable?

they help determine the extent of the stolen assets taken

what are some of the advanced techniques available when searching for information on Google or other search engines?

searches by phrase, google news, domain restrictions, minus search terms, cached results, google images, google earth

how do these advanced techniques aid in the information gathering process?

these advanced search techniques help save time specialize the search results you want to find and allow and indivual to conduct a more in depth search

when searching public records, what are the four different types of information sources available to investigators?

government records, private sources, online databases, internet searches

what is the gramm -leach bliley act? how does it apply to investators?

makes that gaining information from a financial institution by using false pretenses is illegal under this act. this lets investigators obtain the information legally. financial institutions under this act must explain their information-sharing practices to their customer in order keep sensitive information safe. they must now allow their customers to opt-out of information sharing

what is trashing? in what ways can it (in electronic form) help an invesigation?

trashing is when investigators literally look through a person's trash for evidence. the electronic form of this investigation method can help piece back together shredded documents, help find original files that were never fully deleted from a device.

what are the primary advantages and disadvantages of this approach?

some of the advantages of the data-driven approach is that investigators don't have to wait till a fraud has been detected to look for symptoms. with the advancing software, investigators can continually monitor companies for possible fraud. it helps to reduce the cost of fraud for the business by detecting the fraud early on. However, this approach can be costly for the user as well and may provide irrelevant information. it may also be too complex of a system for the user and may require many iterations of queries.

describe the steps in time trend analysis, including correct data preparation

data must be standardized for a time before you start time trend analysis. to correctly prepare data for simple case you can just graph each case in a spreadsheet. when there are larger cases to analyze you must summarize the slope of the graph. the best way to summarize the slope of the graph is to use statistical regression. in statistical regression, the independent variable is the time whereas the dependent variable is one column in the data set.

What types of fraud can be identified with time trend analysis?

vendor fraud, employee fraud, management fraud, investment scam fraud