Ade614 Internal Audit Practices - Role of Internal Audit Function in Fraudulent

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ADE614 Internal Audit Practices

Term Paper:

Role of Internal Audit Function in Fraudulent

Prepared for:

Dr. Yuvaraj Ganesan

Date of Submission: 23rd May 2019

A Paper Submitted for ADE614 INTERNAL AUDIT PRACTICES

In Partial Fulfillment of the Requirements for the Degree of  

Master of Business Administration

           UNIVERSITI SAINS MALAYSIA
GRADUATE SCHOOL OF BUSINESS

Semester II Academic Session 2018/2019

Table of Contents

Global Study towards Occupational Fraud        1

Understand Internal Audit        2

Adherence to Internal Auditing Standard        2

Practical use of Internal Audit        3

Understand Occupational Fraud        5

Categories of Occupational Fraud        6

Impact of Occupational Fraud        7

Motives to Conduct Occupational Fraud        7

Organizational Factors-induced Occupational Fraud Conduct        9

The Role of Internal Audit and Occupational Fraud        9

Fraud Risk Assessment        11

Fraud Prevention        13

Fraud Training        15

Fraud Detection        16

Fraud Investigation        16

Lesson Learnt Session        17

Conclusion        17

Reference        20

Global Study towards Occupational Fraud

Employees’ talent is the driving force for organization’s excellence. However, the same force can also result catastrophic events for the organizations. This is evident with the infamous fraud scandal in Enron, Toshiba and Olympus. Some of the scandals happened due to the absence of internal audit and fraudsters’ effort to undermine internal audit.

In April 2018, Association of Certified Fraud Examiner (hereinafter “ACFE”) had published the 10th edition of global study report towards occupational fraud which revealed 5 interesting points:

Fraud is a global wide phenomenon which happens across organizations & industries

• Approximate $1,477,000 global median loss was reported due to occupational fraud.
• 71% of the victim organizations are profit-seeking organization (both private and public sector) and the remaining are government, not-for-profit organization and other organizations: 16%, 9% and 4% respectively.
• While all industries are affected by occupational frauds, the study found that banking and financial services, manufacturing, government and public administration sectors have the highest number of occupational fraud cases.

Internal audit is still part of the leading mechanism for detecting and preventing fraud

• The global study since its first publication in year 2010 consistently revealed 3 leading fraud detection methods which are tips, internal audit and management review. Internal audit is the second highest at 15% of cases, below tips (40%) and above management review (13%). Regional study, in the context of Asia-Pacific, revealed similar result where internal audit is the second highest fraud detection method at 16% of cases, below tips (47%) and management review (10%).
• Internal audit is more common in below regions for anti-fraud control in comparison to US (5th – 60% of cases) and Western Europe (6th – 80% of cases):

1.  Asia-Pacific (3rd – 80% of cases)
2. Canada (3rd – 71% of cases)
3. Eastern Europe and Western/Central Asia (2nd – 91% of cases)
4. Latin America and the Caribbean (1st – 89% of cases)
5. Middle East and North Africa (2nd – 85% of cases)
6. Southern Asia (2nd – 88% of cases)
7. Sub-Saharan Africa (3rd – 87% of cases)

Though there is a slight slip down in internal audit as detection method compared to the 9th edition on global scale (16.5%), internal audit remains its relevance in addressing occupational fraud with above findings. The following sections will provide a comprehensive study on internal audit, occupational fraud and internal audit role in addressing occupational fraud.

Understand Internal Audit

Internal audit is a non-dependent, assurance-seeking and consulting activity devised to perform value-added and enhancement into the organizations’ operations. These organizational objectives are to be achieved with a systematic and regulated approach  to access and enhance effectiveness of risk management, control, and governance process. People who perform this activity is known as internal auditor.

Their additional role includes supporting management efforts in developing a culture in organization that embraces accountability, honesty, ethics and integrity throughout the organization and establish an ethical working environment.