ACCT1111 Topic 3 v2

Assurance and Forensic Accounting
Topic 3 – Detection and Analysis of Fraud Symptoms

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All details were accurate at the time of printing.

January 2019

i
Contents
Contents ii
Introduction 1
Learning objectives 1
The nature of fraud detection 2
Internal Control Weaknesses 2
Unusual Behaviours, Tips and Complaints 3
Summary 4
References 4
ii Assurance and Forensic Accounting

Introduction
Understanding how to identify fraud symptoms helps in the detection of fraud.
Accounting is usually involved in financial statement fraud. Identifying and
understanding accounting symptoms of fraud is essential for the forensic accountant
and auditor. Auditors in particular must understand internal controls that help detect
fraud. Forensic accountants and auditors need the skills so they can identify and
understand analytical symptoms of fraud. People’s behavioural symptoms help detect
fraud. Forensic accountants and auditors need to identify lifestyle changes and
understand how such changes can help them detect fraud. Fraud perpetrators exhibit
certain behaviours that signal that they are hiding something, like concealment, and
forensic accountants and auditors need the skills to understand and identify those
signals.
Learning objectives
At the end of this topic you should be able to:
 illustrate how to review for unusual or suspicious behaviour
 then contrast how to review internal control weaknesses
 convey the nature of fraud detection
Recommended Text
Fraud Examination, 6th edition, Albrecht et al., (2019). Chapter 5.
Recognising the symptoms of fraud [Excerpt], pp. 163-168
Web resource
All Auditing and Assurance Standards are available from:
http://www.auasb.gov.au/

iii
The nature of fraud detection
Fraud detection is about how firms can uncover and recognise fraud,
hopefully in the early stages of the defalcation process. Firms can be
proactive or reactive in discovering factors of fraud within their
organisations. These factors take the form of symptoms because usually
fraud is concealed by perpetrators and not directly recognised i.e.
You do not see ‘Dr Fraud Expense Cr Cash at Bank’ in the accounts with the
following journal notation ‘stole money from the till’.
The idea behind concealment is to hide the fraud. For example, thefts can be
covered up with fraudulent bookkeeping and reporting, including the omission
of information. The risk fraud perpetrators face is that their fraudulent acts
can be discovered. The question is ‘when’? Some fraud perpetrators have
made attempts to hide their fraud permanently by engaging in arson, i.e
ensures permanent concealment!
Internal Control Weaknesses

Internal control fraud symptoms include:
 Lack of segregation of duties
 Lack of physical safeguards
 Lack of independent checks
 Lack of proper authorization
 Lack of proper documents and records
 Overriding of existing controls (most common)
 Inadequate accounting system.
Three simple procedures to prevent small business fraud:
1. Owners should open and reconcile bank statements

- significant area of non-compliance
2. Pay everything by cheque so there is a record
- can be slow and 'not the way to do business'
3. Owners should sign every cheque themselves
- can be difficult, depending on business size and complexity.
-
iv Assurance and Forensic Accounting

Unusual Behaviours, Tips and Complaints
Before reaching a final decision on the fraud complaint a forensic
accountant may observe the following behaviours by the suspect:
 Inability to relax
 Taking drugs and/or increased drinking
 Sweating
 Increased smoking
 Defensiveness
 Insomnia
 Thinking of excuses, finding scapegoats.
Company employees are in the best position to detect fraud. Therefore

information from them during interviews is very important. Many tips and
complaints turn out to be unjustified. Difficult to know what motivates a
person to complain or provide a tip. Individuals should always be considered
innocent until proved guilty.
Why people are hesitant to come forward:
 Impossible to know for sure that a fraud is taking place

 Fear of being the whistle-blower
 Intimidation by the perpetrator
 Feel that squealing on someone is wrong
 Not easy to come forward.
Summary
Auditors are often criticized for not detecting more frauds. Yet, because of
the nature of fraud, auditors are often in the worst position to detect its
occurrence. When unusual symptoms of fraud become apparent, a more
focused, directed search of where the fraud is originating from should be
conducted. One strong indicator of the occurrence of fraud is if an
employee lives well beyond his or her means. If employees suddenly have
more extravagant lifestyles, auditors may want to assess the source of the
v
money. Most frauds are not detected by auditors. Rather, most are
detected by co-workers, managers, or other employees. Tips and
complaints are the main sources of investigating fraud. People who commit
fraud usually display unusual changes in behaviour. In the next topic we
learn how ratio analysis can trigger results indicating further investigation is
needed.
Class activities
Write a 500 word summary explaining the behaviours that a fraud
suspect might exhibit. In a workplace scenario what would be your
next step as a concerned colleague?
The lecturer will further discuss in class.
References
Albrecht et al., (2019), Fraud Examination, 6th edition, Cengage.
vi Assurance and Forensic Accounting

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Assurance and Forensic Accounting

Topic 3 – Detection and Analysis of Fraud Symptoms

This subject material is issued by RMIT on the understanding that:

All details were accurate at the time of printing.

Topic 3 – Detection and Analysis of Fraud Symptoms

The nature of fraud detection 2

Internal Control Weaknesses 2

Unusual Behaviours, Tips and Complaints 3

ii Assurance and Forensic Accounting

Recognising the symptoms of fraud [Excerpt], pp. 163-168

Topic 3 – Detection and Analysis of Fraud Symptoms

Internal Control Weaknesses

Three simple procedures to prevent small business fraud:

1. Owners should open and reconcile bank statements

iv Assurance and Forensic Accounting

Company employees are in the best position to detect fraud. Therefore

Why people are hesitant to come forward:

 Impossible to know for sure that a fraud is taking place

Albrecht et al., (2019), Fraud Examination, 6th edition, Cengage.

vi Assurance and Forensic Accounting

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