Identifying & Preventing Fraud Flashcards Preview

ACCA: F1: C: Accounting & Reporting Systems, Controls & Compliance > Identifying & Preventing Fraud > Flashcards

Flashcards in Identifying & Preventing Fraud Deck (36):

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

1. Removal of funds or assets
2. Intentional misrepresentation of financial position


Fraud is...

...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


Removal of funds: Common frauds: (12)

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


Theft of cash:

Petty cash


Theft of inventory:

Office stationary (insignificant!)


Payroll fraud:

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


Teeming and lading is...

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


Fictitious customers:

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


Collusion with customers:

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


Bogus supply of goods or services:

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


Paying for goods not received:

Issue invoice for larger quantities than were actually delivered


Meeting budgets or target performance measures:

Siphon off and pocket any profits in excess of the target


Manipulation of bank recons & cash books:

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


Misuse of pension funds and other assets:

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


Disposal of assets to employees:

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


Intentional misrepresentation of financial position:

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


Over-valuation of inventory: (4)

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


Fictitious sales:

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


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

1. Dishonesty
2. Motivation
3. Opportunity


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

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


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

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


Circumstances that might increase the risk profile of a company:

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


Business Risks: (3)

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


Personnel Risks (6):

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


Computer Fraud (4):

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


Reasons for fraud: (4)

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


Factors specific to the business: (3)

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


Reasons for poor controls: (4)

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


General prevention policies: (3)

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


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

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


Controls to combat fraud: (18)

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


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

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


Money laundering is...

...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


Categories of criminal offence: (3)

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


Money laundering process: (3)

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


Guidance to avoid money laundering: (4)

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