Forensic Accounting and Fraud Examination 2e Ch2 Question

Assignment #2

AC 772-100

Xiaoying He

September 11, 2017

1. Forensic Accountant’s List of Questions for Analysis:

1. What is the inventory checking process? Can you provide me a flowchart or diagram?
2. Any controls on the inventory storage and recording processes? Who are the control owners?
3. How the internal auditors play a role in checking the controls and making risk assessment? How often do the internal auditors test the control and did they found any risks and issues during previous audit?
4. Who are allowed to get access to the computer inventory records and who are actually getting the access? Same questions about accessing the physical inventory storage and the written records.
5. Any changes in staffing not long before the period of time when the inventory numbers and records look problematic?
6.  Detailed calculations that Mary Sotto made for her conclusion of missing 20% inventories.

1. DQ 32

1. DQ 39
2. DQ 40
3. DQ 41

External auditors performing financial audits need to comply with AICPA auditing standards that include requirements from SAS99. What is SAS99? What are the advantages and disadvantages of SAS99? Does SAS99 compliance adequately address the intent of the standard?

Based on the 2016 ACFE report, the longer the duration of fraud, the larger financial and other losses and damages the organizations suffer from. The statistics shows that one fourth of the frauds had a detection period of less than half year, while the median detecting time is one and a half year. Almost one third of the fraudulent activities under study were detected at least two years later. When the detection period takes one to two year, the financial harm counts to $150,000 in average. These statistics demonstrate the importance of early detection of fraudulent activities on mitigating the loss of an organization. When the focus is on types of occupational fraud, the statistics show that some frauds take shorter time to be detected, while some may take on average two years or more to be detected. One reason of a long detection period is that a vast majority of the fraudsters take actions of conceal their fraud schemes.

Senior management should take several approaches regarding the detection of fraudulent activity.

1. Building a platform for tips. According to the 2016 ACFE report, tip is the main way of detecting fraud schemes. Senior management should encourage active internal observations and improve employees’ abilities of problem detection. The platform for tips should also be diverse and approachable, so the employees know how to report. The platform can be a hot line, or a reporting system on the company website. If necessary, the senior management can even consider designing a bonus system to encourage the employees say something when they see something. The platform should also give the employees an option to go anonymous, so they feel comfortable and safe to report issues. The investigation process should also protect the privacy of the tip providers.
2. Do not reply on external audit and utilize internal audit better. External audit only initiates 3%-4% of fraud detection. On the contrary, internal audit has been the second or third largest contributor of occupational fraud detection from 2012 to 2016. In 2016 the role that internal audit played in detection fraud increased slightly. In general internal auditors focuses more on operational and functional weaknesses than external auditors, and they play a critical role in assessing the effectiveness of internal controls. Thus, senior management should provide internal audit more power and resources.
3. Small organizations and organizations in specific industry/region should constantly revise their fraud prevention and detection strategies. Small organizations have to face more challenge, because they have limited resources, such as limited budget, technology, professional, and so forth. In this situation, it is important to formalize the business processes as much as they can within the limit. According to the 2016 ACFE report, small business should also increase management’s responsibility and ability on fraud detection. For business in different industries, the characteristics and level of certain risks can be very different. For instance, a heavily technology-based company should strengthen its IT control in particular to protect its patent. Another example is that multinational companies should detect fraud with different approaches based on the region. In Asia-Pacific region, external audit played a more significant role in initiating fraud detection than other regions under study.
4. Training on
5. Application on psychological studies. There are some common characteristics of the fraudsters. By applying the psychological studies of these fraudsters, companies should be able to build a profile of potential fraud conductors through a series of tests of potential and existing employees.

 To deal with the undetected frauds, it is better to be very proactive by strengthening risk assessment and internal controls. In other words, forming and maintaining a holistic, strong prevention system can be better than having to go to the process of a difficult detection.

Reference

Association of Certified Fraud Examiners 2016 Fraud Study - Report to the Nations on Occupational 

Fraud and Abuse.