Fraud Audit Checklist

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Fraud is considered a white-collar crime. It includes embezzlement, management fraud, investment fraud and customer fraud. Most U.S. frauds are found through anonymous tips or by accident. However, according to the Association of Certified Fraud Examiners, internal auditors uncover 20 percent of frauds and external auditors find 12 percent. People commit fraud because of a perceived pressure, a perceived opportunity and a rationalization. This is called the "Fraud Triangle."

Fraud Triangle

  • People commit fraud based on pressure such as greed, living beyond their means, personal financial losses or unexpected financial needs. They also act based on opportunity, such as an employer's failure to gauge a worker's performance, lack of an audit trail or failure to discipline those who commit fraud. Perpetrators can also be driven by thoughts like "the organization owes me," "it's for a good purpose" or "I'm only borrowing money."

Warning Signs

  • The warning signs of fraud include accounting anomalies such as missing documents, old items on bank reconciliations, excessive voids or credits, increased past-due accounts, altered documents, duplicate payments, document sequences that don't make sense, questionable handwriting, and faulty journal entries or inaccuracies in ledgers. Signs can also include unexplained inventory shortages, excess purchases, significant increases or decreases in account balances, excessive late charges, and extravagant lifestyles.

Identifying Fraud

  • When fraud is found or suspected, a fraud examiner performs an audit. The examiner combines expertise of auditing with criminal investigation. Fraud examiners have four main objectives when performing the audit: determining if fraud exists, learning the scope of the fraud, identifying the perpetrators and determining how the fraud occurred.

Prevention

  • The best business practice is to prevent fraud before it occurs. One of the methods to prevent this crime is to create a culture of honesty, openness and assistance. Businesses can also provide fraud-awareness training and create a positive work environment that encourages honesty.

    Companies can reduce opportunities for fraud by having good internal controls, discouraging collusion between employees and customers, monitoring employees, creating an expectation of punishment, providing a hotline for anonymous tips, and conducting proactive auditing.

References

  • "Fraud Examination"; W. Steve Albrecht. et al.; 2006
  • "Auditing and Assurance Services"; Timothy J. Louwers, et al.; 2008
  • Photo Credit Jupiterimages/Photos.com/Getty Images
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