Identifying & Preventing Fraud

Question 1

In a corporate context, fraud falls into 1 of 2 main categories:

Answer 1

1. Removal of funds or assets

2. Intentional misrepresentation of financial position

Question 2

Fraud is…

Answer 2

…deprivation by deceit; a false representation of fact made with the knowledge of its falsity, or without belief in its truth, or recklessly careless, whether true or false

Question 3

Removal of funds: Common frauds: (12)

Answer 3

1. Payroll fraud
2. Conspiracy with other parties
3. Stealing assets
4. Teeming & lading
5. Fictitious customers
6. Collusion with customers
7. Bogus supply of goods or services
8. Paying for goods not received
9. Meeting budgets / target performance measures
10. Manipulation of bank reconciliations & cash books
11. Misuse of pension funds or other assets
12. Disposal of assets to employees

Question 4

Theft of cash:

Answer 4

Petty cash

Question 5

Theft of inventory:

Answer 5

Office stationary (insignificant!)

Question 6

Payroll fraud:

Answer 6

1. Falsify time sheets
2. Miscalculate payslips
3. Fictitious member of staff

Question 7

Teeming and lading is…

Answer 7

…the theft of cash or cheque receipts and offsetting subsequent receipts (not necessarily from the same customer!)

Question 8

Fictitious customers:

Answer 8

Responsibility for taking goods orders as well as the authority to approve new customers for credit

Question 9

Collusion with customers:

Answer 9

1. Reduce the price charged in return for a cut of the saving
2. Suppress invoices or under-record quantities of dispatched goods on delivery notes

Question 10

Bogus supply of goods or services:

Answer 10

Falsely invoice the firm for goods or services that were never supplied (Consultancy; Joseph!)

Question 11

Paying for goods not received:

Answer 11

Issue invoice for larger quantities than were actually delivered

Question 12

Meeting budgets or target performance measures:

Answer 12

Siphon off and pocket any profits in excess of the target

Question 13

Manipulation of bank recons & cash books:

Answer 13

Incorrect descriptions of items and use of compensating debits and credits to make recons work

Question 14

Misuse of pension funds and other assets:

Answer 14

Use as collateral in obtaining loan finance; Assets transferred to the fund at significant over-valuations

Question 15

Disposal of assets to employees:

Answer 15

Manipulate book value so the employee pays below market value for it

Question 16

Intentional misrepresentation of financial position:

Answer 16

1. Over-valuation of inventory
2. Irrecoverable debt policy not enforced
3. Fictitious sales (Selling goods to friends with a promise to buy them back at a later date
4. Manipulation of year end events
5. Understating expenses
6. Manipulation of depreciation figures

Question 17

Over-valuation of inventory: (4)

Answer 17

1. Miscounting
2. Deliveries omitted
3. Returns not recorded
4. Obsolete inventory held at cost instead of being written off

Question 18

Fictitious sales:

Answer 18

Selling goods to friends with a promise to buy them back at a later date

Question 19

There are 3 preconditions that must exist to make fraud possible (‘The fraud triangle’): (3)

Answer 19

1. Dishonesty
2. Motivation
3. Opportunity

Question 20

Assessing the risk of fraud: Sins of high fraud include: (5)

Answer 20

1. Lack of integrity
2. Excessive pressures
3. Poor control systems
4. Unusual transactions
5. Lack of audit evidence

Question 21

General external factors that influence the degree of risk a company is exposed to: (5)

Answer 21

1. Technological changes
2. New legislation or regulations
3. Economic or political changes
4. Increased competition
5. Changing customer needs

Question 22

Circumstances that might increase the risk profile of a company:

Answer 22

1. Changed operating environment
2. New personnel
3. New or upgraded management information systems
4. New overseas operations
5. Rapid growth
6. New technology
7. New products
8. Corporate restructuring

Question 23

Business Risks: (3)

Answer 23

1. Profit levels / margins deviating significantly from industry norm
2. Market opinion
3. Complex structures

Question 24

Personnel Risks (6):

Answer 24

1. Secretive behaviour
2. Expensive lifestyles
3. Long hours or un-taken holidays
4. Autocratic management style
5. Lack of segregation of duties
6. Low staff morale

Question 25

Computer Fraud (4):

Answer 25

1. Computer hackers
2. Lack of training within management
3. Identifying risks (Staying up to date)
4. Need for ease of access and flexible systems

Question 26

Reasons for fraud: (4)

Answer 26

1. Factors specific to the industry
2. Factors specific to the business
3. Changes in circumstances
4. Certain areas - Cash sales

Question 27

Factors specific to the business: (3)

Answer 27

1. Personnel (Authority to dominant managers)
2. Organisation (Unclear structure; lack of supervision)
3. Strategy (Great emphasis on reward by results)

Question 28

Reasons for poor controls: (4)

Answer 28

1. Lack of emphasis on compliance / lack of understanding why controls are required
2. Staff problems (Under-staffing, poor quality or poorly motivated)
3. Changes in senior personnel (Lack of supervision)
4. Emphasis on autonomy of operational management

Question 29

General prevention policies: (3)

Answer 29

1. Emphasising ethics
2. Personnel controls (Interviewing, recruitment, appraisal)
3. Training & raising awareness

Question 30

Prevention is specific, high-risk business areas: (5)

Answer 30

1. Segregation of duties
2. Appropriate documentation
3. Limitation controls
4. Prohibited actions
5. Internal audit concentration

Question 31

Controls to combat fraud: (18)

Answer 31

1. Physical controls (Security)
2. Segregation of duties
3. Authorisation policies (Written)
4. Customer signatures
5. Using words rather than numbers
6. Documentation
7. Sequential numbering
8. Dates
9. Standard procedures
10. Holidays
11. Recruitment policies
12. Computer security
13. Manager & staff responsibilities
14. Fraud officer
15. Availability of information
16. Whistle-blowing
17. Investigation of fraud (Fraud response plan)
18. Evolving control systems

Question 32

Controls to combat fraud: Manager and staff responsibilities: (6)

Answer 32

1. Operational managers - alert!
2. Finance staff - alert!
3. Personnel staff - alert!
4. Internal audit staff - review controls
5. External audit staff - report
6. Non-Executive directors - act

Question 33

Money laundering is…

Answer 33

…any financial transactions whose purpose is to conceal the origins of the proceeds of criminal activity;
also used to avoid paying tax & distort accounting information

Question 34

Categories of criminal offence: (3)

Answer 34

1. Laundering
2. Failure to report
3. Tipping off

Question 35

Money laundering process: (3)

Answer 35

1. Placement: ‘Smurfing’
2. Layering: Gambling
3. Integration: Banking a cheque

Question 36

Guidance to avoid money laundering: (4)

Answer 36

1. Control systems
2. Money laundering reporting officer (MLRO)
3. Internal reporting procedures
4. Adequate records