Chapter 5, Problem 1DQ

To determine

The help of fraud symptoms in detecting fraud.

Answer to Problem 1DQ

Fraud symptoms are the indicators used to identify the perpetrator by the investigator. These fraud symptoms are also called as “Red flags” which helps to investigate whether the indicators resulted from actual deception or caused by any other factors. These symptoms are classified into six categories. They are as follows:

• Accounting anomalies

• Internal control weaknesses

• Analytical anomalies

• Extravagant lifestyle

• Unusual behavior

• Tips and complaints.

Explanation of Solution

• Accounting anomaliesresult from unusual processes and procedures in an accounting system which includes irregularities in source documents, faulty journal entries, and inaccuracies in ledgers. Through these anomalies, the fraud examiners identify whether the support documents exist and are adequate, whether the documents are authentic or fraudulent, whether the expenditure makes sense, and whether all aspects of the documentation are in order.

• Internal control weaknesses are covered the control environment, the accounting system, and control activities or procedures. It includes Lack of segregation of duties, Lack of physical safeguards, Lack of independent checks, Lack of proper authorization, Lack of proper documents and records, Overriding of existing controls, and Inadequate accounting system.

• Analytical anomalies are relationships, procedures, and events that don’t make sense. These include transactions either common or business or that appear to be unreasonable. Examples for these are Excessive number of checking accounts, use of several different banks, and Unexpected overdrafts or declines in cash balance etc.,

• Extravagant lifestyleis the Lifestyle changes are often the easiest of all symptoms to detect. Although looking at bank records, investment records, and tax return information are difficult to access; property records, UCC filings, and other records are easy to check to determine whether there are assets that have been purchased or liens that have been removed.

• Unusual behavior is the sudden changes in penetrator’s behavior due to guilt, fear, and stress which results in insomnia, Increased drinking, and unusual irritability and suspiciousness, etc.

• Tips and complaints are categorized as fraud symptoms because sometimes they may false in evidence.