Major categories of fraud

Full Answer Section

    Techniques to Discover Fraud There are a variety of techniques that can be used to discover fraud. Some of the most common techniques include:

• Analytical reviews: Analytical reviews involve comparing data from different sources to identify unusual patterns or trends. For example, an auditor might compare sales data from one year to the next to identify any unusual changes.
• Tests of controls: Tests of controls involve evaluating the effectiveness of internal controls. For example, an auditor might test the controls over cash disbursements to ensure that all payments are properly authorized and approved.
• Substantive tests of transactions and account balances: Substantive tests of transactions and account balances involve examining specific transactions and account balances to ensure that they are accurate and complete. For example, an auditor might test a sample of sales transactions to ensure that they are supported by valid documentation.

Can the Same Techniques Be Used to Discover All Three Categories of Fraud? Yes, many of the same techniques can be used to discover all three categories of fraud. For example, analytical reviews can be used to identify unusual patterns or trends that may be indicative of fraud in any category. Tests of controls can also be used to evaluate the effectiveness of internal controls for preventing and detecting fraud in all categories. However, there are some specific techniques that are more likely to be effective in discovering certain types of fraud. For example, substantive tests of transactions and account balances are more likely to be effective in discovering asset appropriation fraud, while tests of controls over financial reporting are more likely to be effective in discovering financial statement fraud. Examples of Techniques Used to Discover Different Types of Fraud Here are some examples of specific techniques that can be used to discover different types of fraud: Asset Appropriation Fraud:

• Analytical reviews: An auditor might compare inventory turnover rates to industry benchmarks to identify any unusual changes.
• Tests of controls: An auditor might test the controls over inventory to ensure that all inventory is properly recorded and controlled.
• Substantive tests of transactions and account balances: An auditor might perform physical inventory counts or observe inventory counting procedures.

Corruption Fraud:

• Analytical reviews: An auditor might compare expenses to prior periods or to industry benchmarks to identify any unusual changes.
• Tests of controls: An auditor might test the controls over procurement to ensure that all purchases are properly authorized and approved.
• Substantive tests of transactions and account balances: An auditor might review contracts and invoices for evidence of kickbacks or bribes.

Financial Statement Fraud:

• Analytical reviews: An auditor might compare revenue growth to industry growth rates to identify any unusual changes.
• Tests of controls: An auditor might test the controls over revenue recognition to ensure that all revenue is properly recorded.
• Substantive tests of transactions and account balances: An auditor might perform revenue cut-off tests or confirm accounts receivable with customers.

Conclusion There are a variety of techniques that can be used to discover the three major categories of fraud: asset appropriation, corruption, and financial statement fraud. Many of the same techniques can be used to discover all three categories of fraud, but there are also some specific techniques that are more likely to be effective in discovering certain types of fraud. Organizations can reduce the risk of fraud by implementing effective internal controls and by conducting regular audits. By using the appropriate techniques, auditors can detect fraud and help organizations to protect their assets.  

Sample Answer

   

The three major categories of fraud are:

• Asset appropriation: This type of fraud involves the theft or misuse of assets, such as cash, inventory, or equipment.
• Corruption: This type of fraud involves the use of bribery, extortion, or other illegal means to gain an advantage or benefit.
• Financial statement fraud: This type of fraud involves the intentional misstatement of financial information, such as revenue, expenses, or assets.