Part 2 D – 1 V3.0 THE IIA’S CIA LEARNING SYSTEM TM Section Topics 1.Discovery sampling 2.Interrogation techniques 3.Forensic auditing

Part 2 D – 1V3.0

THE IIA’S CIA LEARNING SYSTEMTM

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Section Topics

1. Discovery sampling

2. Interrogation techniques

3. Forensic auditing

4. Use of computers in analyzing data

5. Red flags6. Types of fraud

Part 2, Section D

Part 2 D – 2V3.0


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Fraud Investigation Roles and Players

Standard 1210.A2

“Internal auditors must have sufficient knowledge to evaluate the risk of fraud and the manner in which it is managed by the organization, but are not expected to have the expertise of a person whose primary responsibility is detecting and investigating fraud.”

Part 2, Section D, Introduction

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What are some of the objectives of a fraud investigation?

Sample answer:

• Protect the innocent, establish facts, resolve the matter, and clear the air.

• Quickly stop loss.

• Support successful prosecution.

• Identify, gather, and protect evidence.

• Identify and interview witnesses.

• Identify behavior patterns.

• Determine motives and suspects.

• Provide basis for discipline, etc.

• Account for and recover assets.

• Identify control weaknesses to be fixed.

Discussion Question

Part 2, Section D, Introduction

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Discussion Question

If you are interviewing (not interrogating) an audit client, why do you establish rapport? What are some methods of doing so?

Sample answer:

Why—To make client comfortable with providing information.

Methods—Agree on convenient time andplace; keep number of interviewers to aminimum; dress appropriately for client and situation; use open, attentive body language.

Part 2, Section D, Topic 2

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Discussion Question

What are some hallmarks of active listening?

Sample answer:

• Soft eye contact.• Facial expressions showing interest.• Brief silences to allow for more information.• Paraphrasing.• Unobtrusive note-taking.


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Discussion QuestionWhat are some examples of open and closed questions?

UseOpen

Closed To uncover facts in brief statements; to get to yes or no.

To invite opinions, descriptions, narratives, etc.

Examples

How often do employees skip a step in the approved process?

Please describe your unit’s step-by-step recycling procedure.

Type


Answer:

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Discussion Question

What are some interview behaviors that you would consider indicators of fraud?

Sample answer:

Inappropriate attitude

No eye contact

Anxiety

Attitude change

Restlessness.

Leaning away

Changing answers


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Interviewing Model

Document• Complete report

soon.

• Don’t transcribe.

• Include attitude, next steps.

Agree

Prepare

• Summarize key points.

• Confirm or correct points.

• Define goals.

• Get background.

• Plan questions, strategies.

Conduct

• Stick to plan.

• Verify fact or hearsay.

• Take notes.


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Discussion Question

You are a specialized fraud investigator.

You don’t already know the answers.

A. Interview

B. Interrogation

You want to confirm or eliminate suspicion of fraud.

Match the questioning method on the right to the appropriate context for using that method on the left.

You want a confession.

A

B

A

Answers:

B


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The Forensic Auditor

Internal auditor Forensic auditor

Identifies fraud indicators. Gathers evidence suitable for use in court—and can present it in court.

Pieces together the fraud narrative from experience, knowledge, and intuition.

Knows when to call for full fraud audit. May be certified by Association of

Certified Fraud Examiners (ACFE).


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Discussion Question

Sample answer:

What are some types of information that computers can provide?

• Voice mail (computer-stored)• Internet history reports• Computer forensics

• Word-processeddocuments

• Customer lists• E-mail logs• Financial records• Scheduling systems or logs• Operations logs• Personnel records


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Types of Computer Analysis

Numerical analysis

Enterprise auditing

Regression analysis

Continuous online auditing

Study of number sequences (e.g., check amounts) for unlikely patterns, often using Benford’s Law

Comparison of transactions as (or soon after) occurrence against predefined acceptable patterns

Mining data in enterprise-wide systems to identify suspicious patterns

Computer analysis of relationship between variables—one dependent on the other(s)


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Types of Red Flags

Part II D-5

Audit cycle

red flags

Environmental

red flags

Industry-

specific re

d

flagsPerpetra

tor

red flags


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Discussion Question

Sample answer:

What are some examples of audit cycle red flags?

Changes to key figures pre-financing; sales receivables discrepancies

Expenditure cycle

Production cycle

Financing cycle

Revenue cycle

Consistent overruns; excessive waste or write-offs; unsecured warehouse

High turnover in purchases/payroll; inordinate purchasing from a vendor

Unusual increases; sales to shipments discrepancies; slow collections


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Discussion Question

Sample answer:

What are some examples of environmental red flags?

• Stiff, unfair competition

• Lax regulation

• Industry or cultural tendency toward illegal practices (bribes, etc.)

• Loss of contracts; reorganization that disruptscontrol policies; poor ethics training

• International organizations and organizations dependent on computer technology


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Discussion Question

Sample answer:

What are some examples of industry-specific red flags in the following areas?

Financial services

Manufacturing

Insurance

Energy

Misstatement of sales and earnings; diversion of cash from accounts; phony loans

Cost overruns and discrepancies

Fraudulent claims; payouts to phony clients; misevaluation of underwritten properties

False valuation of assets; misstatement of profits; bribes and cover-ups


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Discussion Question

Sample answer:• Pattern of complaints

• Decline in morale or attendance

• Abrupt resignations

• Evasive answers; adversarial attitude; lack of cooperation during audit

• Unexplained variances; unusual shortages in cash or inventories; missing or altered documents

• Managers who are late with reports, play favorites

What are some examples of perpetrator red flags?


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Discussion Question

Sample answer:

• Fictitious revenues

• Improper asset valuation

• Concealed liabilities

• Improper disclosures

What are some examples of financial statement red flags?


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Discussion Question

Financial statement fraud

What are some examples of fraud in each area?

Skimming cash; diverting payments; pocketing deposits; selling waste and keeping proceeds

Sample answer:

Diverting money from phony accounts to oneself; altering timecards; faking expense reports

Sale of fictitious assets; intentionally concealing events, transactions, or data; theft of office equipment and supplies

Illegal business activities; intentional errors to reduce tax liabilities; failure to act as required; bid rigging

Fictitious revenues; intentional, improper transfer pricing; concealing liabilities

Misuse or theft of assets

Bribery and corruption

Fraudulent disbursement

Cash theft


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Reinforcing Activity 2-8Part 2, Section D

Fraud Knowledge Elements

Part 2, Section D

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End of Section D

Questions?

Part 2, Section D

Documents

Part 2 D – 1 V3.0 THE IIA’S CIA LEARNING SYSTEM TM Section Topics 1.Discovery sampling 2.Interrogation techniques 3.Forensic auditing