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FRAUD AUDITS

What is a Fraud Audit?

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A fraud audit is a specialized type of audit that focuses on detecting, preventing, and investigating fraudulent activities within an organization. The primary goal of a fraud audit is to uncover any instances of fraud, misappropriation of assets, corruption, financial manipulation, or other dishonest activities that could potentially harm the organization. Unlike traditional audits, which primarily focus on financial accuracy and compliance, fraud audits are specifically designed to identify intentional misconduct.

 

Fraud audits can be initiated due to suspicions or evidence of fraud, or as part of regular preventative measures to ensure that an organization is taking appropriate steps to detect and deter fraudulent behavior.

Benefits of a Fraud Audit:
  1. Early Detection of Fraud:

    • A fraud audit helps organizations detect fraud early before it becomes widespread or causes significant financial damage. Early detection allows for swift intervention and damage control.

  2. Prevention of Future Fraud:

    • By identifying weaknesses in internal controls and organizational processes, a fraud audit provides valuable recommendations for improving policies and procedures to prevent future fraudulent activities.

  3. Improved Internal Controls:

    • Fraud audits help identify gaps or inefficiencies in existing internal controls, such as inadequate separation of duties, weak approval processes, or insufficient monitoring of transactions. Auditors provide recommendations for strengthening these controls.

  4. Enhanced Risk Management:

    • Organizations can better manage fraud risk by implementing systems and processes based on the findings of a fraud audit. This includes using more robust fraud detection tools, improving employee screening, and enhancing monitoring systems.

  5. Legal Protection:

    • Fraud audits help ensure that an organization is compliant with legal and regulatory standards, reducing the risk of legal penalties. The documentation from a fraud audit can also serve as evidence in legal proceedings, such as prosecuting fraudsters or recovering stolen assets.

  6. Preserving Reputation:

    • Detecting and addressing fraud quickly can help preserve an organization’s reputation by demonstrating to stakeholders, customers, and investors that the company is committed to transparency, ethical behavior, and accountability.

  7. Financial Loss Recovery:

    • A fraud audit can help quantify financial losses caused by fraud and work towards recovering stolen assets through legal means or insurance claims.

Some Specific Client Needs:

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"How can I ensure my company is capable of detecting, preventing, or investigating fraudulent activities within the organization?"

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"How can we identify financial discrepancies or unusual activities indicative of fraud, waste, or mismanagement?"

Why Choose Us?

We are committed to driving tangible results for your business. With specialized &/or expert knowledge, skills, competence & experience in Auditing, our proven track record and dedication to excellence make us the ideal partner for your business needs & requirements.

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We will give you two (2) useful actual STAR Scenarios allowing us to provide clear, concise examples of our expertise, skills, competence & knowledge in action. It demonstrates our problem-solving abilities, highlights our strategic approach, and emphasizes the tangible outcomes of our work. By focusing on real results, we can effectively show you how we turn challenges into opportunities and drive success for our clients. Whether you're looking for increased profits, improved efficiency, risk management, internal controls & business processes, or innovative solutions, the STAR method helps you understand exactly how we deliver value.  You will see more of these as you continue to browse our services and get to know The CFBS Advantage.

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With this two (2) STAR Scenarios we demonstrated the following skills, among others: 

Risk Assessment Skills 
Internal Controls Evaluation 
Audit Planning & Execution
Sampling Techniques
Report Writing & Communication Skills
Teamwork Skills
Leadership Skills
Independence & Objectivity
Analytical & Critical Thinking
Attention to Details
Client Management
Project Management

Fraud Detection & Investigation

STAR Scenario #1: Disbursement Fraud

SITUATION:

Need to assist co-auditor in verifying tampered and fabricated receipts & disbursement documents.

TASK:

Validate suspected tampered and fabricated receipts & disbursement documents.

ACTION:

1) Identified nature of receipts and disbursement documents;
2) Planned & executed on audit procedures obtaining cooperation of vendors &/or obtaining sample valid receipt documents from vendors.

RESULTS:

1) Suspected tampered and fabricated receipts & disbursement documents were confirmed and verified to be fraudulent.

STAR Scenario #2: Used ACL in Fraud Detection

SITUATION:

Audit Command Language (ACL) skills was needed however I don’t know ACL & most of the audit team also lack ACL skills.

TASK:

Learn ACL & use in inventory audit engagement.

ACTION:

1) Quickly self-study ACL using ACL materials with few coaching from Senior Auditor;
2) Used ACL in inventory audit engagement.

RESULTS:

1) Using ACL, I was able to analyze central distribution warehouse of a multinational company quickly and effectively coordinating periodic wall to wall physical inventory ensuring that all warehouse locations are included and results of physical inventory are validated & communicated;
2) Able to train audit colleague to use ACL in fraud detection & investigation.  Audit colleague was immediately able to use ACL skills in fraud detection & investigation.  He eventually was able to lead teams of auditors in fraud detection & investigation.  From what I heard overtime, he could have detected & uncovered various fraud valued and could total at least P30M++.

Key Features of Fraud Audits:
  1. Objective:

    • The main objective of a fraud audit is to detect and uncover fraudulent activity within an organization. This could involve reviewing financial records, transactions, and other documents to identify irregularities or patterns that suggest fraud or dishonesty.

    • Another goal is to assess the effectiveness of internal controls in preventing fraud and provide recommendations to strengthen these controls.

  2. Scope:

    • Fraud audits can investigate any form of fraud, including:

      • Asset misappropriation (e.g., theft, embezzlement, payroll fraud).

      • Financial statement fraud (e.g., misstating financial information to mislead stakeholders).

      • Corruption (e.g., bribery, kickbacks, conflicts of interest).

      • Procurement fraud (e.g., collusion with suppliers or contractors).

      • Cyber fraud (e.g., hacking, data breaches, online payment fraud).

  3. Approach:

    • The audit typically involves gathering and analyzing financial records, transaction details, employee interviews, and documentation to detect anomalies, misstatements, or other signs of fraudulent behavior.

    • Data analytics tools may be used to identify patterns or unusual transactions that deviate from normal behavior.

    • Fraud audits often require a forensic approach, as the auditor needs to meticulously examine records, identify discrepancies, and follow evidence trails.

Steps Involved in a Fraud Audit:
  1. Planning & Preliminary Investigation:

    • The fraud audit begins with identifying the suspicion or red flags of fraud. These could come from tips (whistleblower reports), internal controls, or an external party (e.g., vendors or customers).

    • Initial assessment: The auditor assesses the available information and determines the scope and focus of the fraud investigation.

    • Define objectives: The auditor determines what specific fraudulent activities will be investigated (e.g., asset misappropriation, financial statement fraud).

  2. Gathering and Analyzing Evidence:

    • Review of financial records: Auditors carefully examine financial documents, accounting entries, balance sheets, income statements, and transaction records for signs of discrepancies or inconsistencies.

    • Forensic accounting: In cases of suspected financial fraud, the auditor will use forensic accounting techniques to trace financial transactions and identify any irregularities.

    • Data mining: Fraud audits often employ data analytics to search for unusual patterns or outliers in financial transactions. For example:

      • Unexplained spikes in certain expenses.

      • Multiple transactions that are just below approval thresholds.

      • Alterations in vendor or employee payment histories.

    • Document examination: Fraud auditors may examine contracts, emails, invoices, purchase orders, and receipts for any forged or falsified documents that could be linked to fraudulent activities.

  3. Interviews and Inquiries:

    • The fraud audit often involves interviewing employees, vendors, or other stakeholders to gather information and uncover potential motives or behaviors that could indicate fraudulent activity.

    • Employee interviews: Key individuals, particularly those with access to financial resources or sensitive information, may be interviewed to understand their actions and roles in the fraud or possible cover-up.

    • Vendor and supplier interviews: In cases of procurement fraud or corruption, auditors may contact suppliers to verify the legitimacy of contracts, invoices, or payments.

  4. Tracing & Following the Fraud Trail:

    • The auditor traces financial transactions and records to uncover the full extent of the fraud. This can involve identifying discrepancies in:

      • Payment histories.

      • Accounting entries and journal adjustments.

      • Transfers of assets or funds to unauthorized accounts.

    • The auditor works backward from suspicious transactions to discover the root cause of the fraud and the individuals involved.

  5. Identifying the Fraud Scheme:

    • After gathering evidence, the auditor will attempt to categorize the type of fraud committed. Some common schemes include:

      • Embezzlement: Employees siphoning off money or assets for personal gain.

      • Kickback schemes: Employees or managers receiving bribes or commissions from vendors or suppliers in exchange for favorable contracts.

      • Payroll fraud: Falsification of employee hours or creation of fictitious employees to divert company funds.

      • Financial statement fraud: Manipulating financial statements to make the company’s financial health appear better than it is (e.g., overstating revenues, understating liabilities).

  6. Reporting Findings and Conclusions:

    • The auditor compiles all findings and presents a comprehensive report that details the fraud detected, the people involved, the amount of financial loss, and any gaps in internal controls or processes.

    • Documentation of evidence: The auditor must maintain a clear and organized record of all evidence collected, which could be used in legal proceedings if necessary.

    • Recommendations: The auditor offers recommendations for mitigating future fraud risk, which may include enhancing internal controls, implementing stricter monitoring procedures, or improving employee awareness and training on ethical practices.

  7. Recommendations for Improvement:

    • Strengthen internal controls (e.g., segregation of duties, enhanced approval processes, and auditing procedures).

    • Implement fraud detection systems or data monitoring software to spot unusual transactions in real-time.

    • Educate employees about fraud prevention and encourage whistleblowing and ethical behavior.

    • Revise the company’s policies and procedures to make it more difficult for fraud to occur.

  8. Legal Action and Follow-Up:

    • If the fraud is substantiated, the organization may pursue legal action, such as reporting the fraud to law enforcement or pursuing civil litigation.

    • The auditor may work with legal professionals to prepare evidence for potential legal proceedings, such as prosecution or asset recovery.

When Should a Fraud Audit Be Conducted?

  1. Suspicion of Fraud:

    • If there is a specific suspicion or whistleblower tip regarding fraudulent activities (e.g., employee theft, vendor corruption), a fraud audit should be initiated immediately.

  2. Regular Fraud Prevention Measures:

    • Even in the absence of fraud suspicion, a company may conduct periodic fraud audits as part of its preventive measures to proactively detect vulnerabilities and strengthen internal controls.

  3. After Identifying Red Flags:

    • If routine audits or internal controls identify red flags, such as unusual financial transactions, unexplained discrepancies, or inconsistent behavior, a fraud audit may be triggered to investigate further.

  4. During Mergers or Acquisitions:

    • When an organization is undergoing a merger or acquisition, conducting a fraud audit can help identify any hidden fraudulent activities in the target company that may affect the deal or the overall business operations.

  5. In Response to Legal or Regulatory Requirements:

    • Some industries or regulatory bodies may require companies to conduct fraud audits periodically or in response to suspected fraud (e.g., financial institutions or publicly traded companies).

Summary:

A fraud audit is a specialized investigation aimed at detecting, investigating, and preventing fraudulent activities within an organization. By systematically reviewing financial records, transactions, and internal controls, fraud auditors identify irregularities or misconduct that could harm the organization. Through forensic accounting and data analysis techniques, fraud audits help detect fraud early, improve internal controls, and prevent future fraudulent activity. Additionally, the findings of a fraud audit can lead to legal action, asset recovery, and a strengthened organizational framework for ethical conduct.

Audit
Why CFBS?

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CFBS’ Internal Audits provides an independent, objective assurance and consulting activity designed to continuously add value and improve an organization’s operations. We help organization’s accomplish its objectives by bringing a systematic, disciplined approach to continuously evaluate and improve the effectiveness of risk management, control, and governance processes. Our more than fifteen (15) years of experience, professional service practice & recognized excellence, education & training gained from various industries can give you much leverage & advantages.

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