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Chapter 0 - Overview
Course Objectives
During this course, you will
• Learn who commits fraud, and why.
• Understand the auditor's responsibilities under SAS 99.
• Become familiar with fraud schemes and how to detect them.
• Learn the roles and tasks of the investigative accountant.
• Review fraud schemes and the four types of fraud.
• Understand an investigative methodology.
• Learn the importance of chain of custody in handling critical documents reviewed in the process.
• Examine the investigative techniques of the forensic accountant.
Introduction
The events of the past few years, such as Enron, WorldCom, and others, have heightened the significance of the forensic accounting segment of the accounting profession. The events being played out in the credit/financial crisis can only increase the need for forensic accounting specialists. While the forensic accounting concept has always been an important part of both civil and criminal litigation, these recent events have increased an interest in the process as it applies to the detection of deceptive activity in major businesses and corporations.
Organization
This course is designed to assist professional accountants, whether in public practice or industry, in the management of fraud risks and fraud investigation for their clients and employers. While other courses tend to focus on certain aspects of fraud forensics, this course is designed to give a solid foundation in all major aspects.
Section A - Identifying and Managing Fraud Risk
Explains fraud basics (who commits fraud and why) and develops deterrence and detection strategies. Specific chapters include:
• Fraud basics, including the fraud triangle
• Deterrence and prevention
• Early detection strategy
Section B - What the Auditor Needs to Know
Identifies how SAS 99 has changed audit practice and develops an audit approach relating to an auditor's responsibilities for detecting material misstatements due to fraud. Specific chapters include:
• Brainstorming
• Effective inquiries related to fraud
• Audit approach and procedures
Section C - Detecting Misappropriation Schemes
Describes the types of occupational fraud and identifies the red flags associated with them. Specific chapters include:
• Cash theft schemes
• Billing schemes
• Payroll schemes
• Expense reimbursement schemes
• Check-tampering schemes
• Register disbursement schemes
• Fraud involving inventory, supplies and fixed assets
Section D - Recognizing Financial Statement Fraud
Explains how financial statement frauds occur and are concealed. Specific chapters include:
• Revenue related fraud
• Inventory and cost-of-goods sold fraud
• Understatement of liabilities
• Overstatement of assets
• Inadequate disclosure fraud
Section E - Responding to Fraud Incidents and the Role of the Forensic Accountant
Explains the roles and tasks of the investigative accountant. This section centers on techniques used by accountants to investigate fraud. Then it covers the responsibilities and inherent risk that come with stepping into the witness stand to defend a position in a court of law. Specific chapters include:
• Issues in fraud incident response
• The unique role of the forensic accountant
• Public records search . Interviewing
• Using documents
• Link and data analysis
• The written report
• The deposition
• The witness stand
• Alternative solutions
Section A - Identifying and Managing Fraud Risk
Chapter 1 - Fraud Basics
Learning Objectives
After studying this chapter you should be able to
• Agree on a working definition of fraud that will be used in this program.
• Understand the Three Level Response to fraud.
• Understand who commits fraud, and why.
• Identify the impact of pressure, rationalization and opportunity on basically honest people.
• Understand how Statement of Auditing Standards 99 Consideration of Fraud in a Financial Statement Audit can form the basis of effective fraud risk management for both auditors and organization managers.
Introduction
In recent years, the fraud expectations placed on professional accountants and auditors have reached an all time high. In government, the board room, and throughout the general public the belief exists that CPAs are experts in fraud issues, and that regardless of whether we are in public practice or industry, we possess and can deliver solid solutions to the many risks of fraud, wrongdoing, and misconduct. For the most part, this belief is seriously flawed.
This program is designed to assist professional accountants in the management of fraud risks for their clients and employers. The content includes concepts and suggestions that can be applied by both external and internal auditors as well as professional accountants in for profit business, government, education, and not-for-profit organizations.
What Do We Mean By Fraud
To start, let us agree on a working definition of fraud. Dictionaries definitions include terms like trickery or deceit aimed at obtaining an unfair advantage. Black's Law Dictionary provides further insight: it includes "all multifarious means¡¦which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth."
In Rule 10b-5, the Securities and Exchange Commission states the following:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or the mails, or of any facility of any national securities exchange,
(a) to employ any known device, scheme, or artifice to defraud,
(b) to make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
In July 2008, the AICPA, the Institute of Internal Auditors, and the Association of Certified Fraud Examiners released a joint document titled "Managing the Business Risk Fraud: A Practical Guide." According to this very helpful document, "Fraud is any intentional act or omission designed to deceive others, resulting in the victim suffering a loss and/or the perpetrator achieving a gain."
Common in all of these and other definitions is the concept of false statements or acts, with intent to deceive a victim, resulting in damages to the victim. For simplicity in this program, this broad definition will work well. We will use the term fraud to include all similar acts regardless of whether they actually meet the standard of violations of the law. We will include the risks of wrongdoing, misconduct, and corruption. In short, we are talking about lying and stealing. And in this program, we will call it all fraud.
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