Audits That Keep Fraudsters Guessing


Scratch the surface of many audit plans and you’ll find predictable elements that someone bent on fraud can anticipate and foil. That’s why SAS no. 99, Consideration of Fraud in a Financial Statement Audit, requires auditors to incorporate elements of unpredictability into their procedures. Here’s how.
   
Use random sampling. Auditing a patternless selection of items makes it impossible for fraudsters to determine which will be chosen.

Conduct surprise visits. Showing up unannounced to count inventory prevents employees from fraudulently moving goods from one location to another just to fool auditors.

Change the timing. At clients where accounts receivable traditionally are confirmed at fiscal year-end, try performing this audit procedure two months early.

Vary your technique each year. If you’ve always tested a sample of transactions posted to an account, switch to an analytical test that compares account activity with production data. That might make fraud easier to spot.

Evaluate low-profile accounts. Selecting accounts that are not normally audited might reveal items being hidden in them for just that reason.

Test small accounts. Checking them could reveal fraudulent transactions spread over several accounts of relatively insignificant size.

Look for bogus patterns. Use Benford’s Law, a statistical formula for evaluating the frequency of given values in a random sample, to expose implausible numeric data. (See “ I’ve Got Your Number, JofA , May99, page 79.

Observe operations discreetly. Monitoring customer traffic or vendor deliveries from a nearby vantage point may reveal discrepancies in recorded revenue.

Review whistleblower files. Look over employee reports of company mal- or misfeasance for indications of fraud.

Use audit software. Test large electronic transaction files for duplicate payments, invoices or addresses for multiple employees or vendors that often escape notice when checked manually.

Get a clearer view of the numbers. Use graphs to display daily, weekly or monthly data—such as the number and dollar amount of transactions or journal entries—on key cycles or processes to make it easier to spot abnormal amounts and address the risk of management override.

Embed software monitors. Get the client’s permission to design and plant a program to capture, encrypt and record key data for auditors to analyze later.

Check the Web. Visit Internet chat groups in which employees who own the client’s stock discuss operational or other issues that might merit consideration as part of an effective audit.

Use alternative models. Develop independent evaluation models and assumptions, instead of using those supplied by management, to verify clients’ estimates of warranty costs and other charges.

Editor’s note: SAS no. 99 (product no. 060701JA) can be ordered at www.cpa2biz.com .

Source: Thomas E. McKee, CPA, professor of accountancy at East Tennessee State University’s College of Business and Technology, Johnson City (e-mail temckee@etsu.edu ).

SPONSORED REPORT

How to make the most of a negotiation

Negotiators are made, not born. In this sponsored report, we cover strategies and tactics to help you head into 2017 ready to take on business deals, salary discussions and more.

VIDEO

Will the Affordable Care Act be repealed?

The results of the 2016 presidential election are likely to have a big impact on federal tax policy in the coming years. Eddie Adkins, CPA, a partner in the Washington National Tax Office at Grant Thornton, discusses what parts of the ACA might survive the repeal of most of the law.

QUIZ

News quiz: Scam email plagues tax professionals—again

Even as the IRS reported on success in reducing tax return identity theft in the 2016 season, the Service also warned tax professionals about yet another email phishing scam. See how much you know about recent news with this short quiz.