Fraud and Errors

Threats to AIS

• Natural and political disasters
• Software errors and equipment malfunctions
• Unintentional acts
• Intentional acts

Fraud

• Definition: Gaining an unfair advantage over another person.
• Legal traits:
  • False statement, representation, or disclosure
  • A material fact that induces action
  • Intent to deceive
  • Justifiable reliance by the victim
  • Injury or loss suffered by the victim

Common Categories of Fraud

• Corruption: Dishonest conduct by those in power.
• Misappropriation of assets: Theft of company assets.
• Fraudulent financial reporting: Intentionally misleading financial statements.

Auditor’s Responsibility (SAS 99)

• Understand fraud risks.
• Discuss material misstatement risks.
• Obtain information to identify and assess risks.
• Evaluate audit test results.
• Document and communicate findings.
• Incorporate a technology focus.

Conditions for Fraud (Fraud Triangle)

• Pressure: Incentive or motivation.
• Opportunity: Ability to commit and conceal.
• Rationalization: Justification for illegal behavior.

Computer Fraud Classifications

• Definition: Fraud requiring technology to perpetrate.
  • Input
  • Processor
  • Computer instruction
  • Data
  • Output

Input Fraud

• Altering or falsifying computer input, such as phony source documents.

Processor Fraud

• Unauthorized system use.

Computer Instructions Fraud

• Tampering with software, illegal copying, unauthorized use, or developing unauthorized software.

Data Fraud

• Illegally using, copying, browsing, searching, or damaging company data.

Output Fraud

• Altering or falsifying computer output.

Preventing and Detecting Fraud

• Create a culture of integrity.
• Adopt a structure that minimizes fraud.
• Assign authority and ensure accountability.
• Communicate policies and develop security measures.
• Implement strong internal controls and segregate accounting functions.
• Require independent checks and reconciliations.
• Restrict access through system authentication.
• Implement computer controls.
• Use encryption and regularly update systems.
• Assess fraud risk and conduct audits.
• Establish a fraud hotline and maintain an audit trail.
• Install fraud detection software and monitor system activities.
• Maintain insurance and implement business continuity plans.
• Store backup copies securely off-site.

Using Data Analytics

• Data analytics software tools are effective for examining data populations.
• Techniques include:
  • Outlier detection
  • Anomaly detection
  • Regression analysis
  • Semantic modeling
  • Benford’s Law