The Fraud Audit: Responding to the Risk of Fraud in Core Business Systems


Praise for The Fraud Audit

"I totally agree with Leonard Vona that data mining, when used to its fullest, is the heart and soul of a good fraud audit program. Every auditor needs this book to better understand fraud scenarios and how data mining with audit software like IDEA can help uncover fraud. It's the most comprehensive and easy-to-read book on fraud auditing that I have ever seen." —Carolyn J. Newman, President and cofounder, Audimation Services, Inc.

"This book is unbelievable: a necessity as critical as a laptop for anyone who performs audits and is responsible for preventing or detecting fraud schemes and scenarios. Much like his first book, Fraud Risk Assessment: Building a Fraud Audit Program, Leonard takes his vast experience in auditing for fraud, along with how he thinks, contemplates, plans, executes, and concludes an engagement, and gives it all away in amazing detail. Identifying the specific steps and measures to complete a fraud audit from brainstorming through analyzing resulting red flags, Leonard includes specific risks, schemes, and concealment methods segregated by major cycle areas. His scientific approach to detecting fraudulent activity coupled with the depth and detail he provides is unsurpassed. As an added bonus, his included appendices go well beyond any audit programs I have ever encountered—this book is equivalent to having Leonard sitting right there with you as a resource on your engagement team."—Stephen A. Pedneault, CPA/CFF, CFE, founder and Principal, Forensic Accounting Services, LLC

"An essential sequel to Fraud Risk Assessment! The Fraud Audit bridges the gap between fraud risk assessment and its application and use with the audit program. Vona expounds on the use of 'data mining' as a tool to detect fraud schemes within the subsidiary and general ledger. Mr. Vona has provided an insightful teaching guide as well as a reference guide for all professionals."—Margaret J. Fredrickson, CPA, Founding Partner, Kirkland Albrecht & Fredrickson, LLC

LEONARD W. VONA, CPA, CFE, is CEO of Fraud Auditing, Inc., and a world-renowned authority in fraud investigation. He has provided expert witness testimony in federal and state courts; consulted with corporations around the world; and is the author of Fraud Risk Assessment: Building a Fraud Audit Program, published by Wiley. A financial investigator with more than thirty years of diversified auditing and forensic accounting experience, including a distinguished eighteen-year private industry career, he regularly speaks at audit conferences and developed the Fraud Training Curriculum for the MIS Training Institute, an internationally recognized audit training organization.
Preface xi

Chapter 1: What Is a Fraud Audit? 1

Why Respond to Fraud Risk? 3

The Fraud Paradigm 4

Fraud Auditing 5

Fraud Defined 8

The Fraud Triangle 8

Responses to the Risk of Fraud 12

Summary 13

Chapter 2: Professional Standards 15

Overview 16

Fraud Audit Standards 18

Summary 25

Chapter 3: Fraud Scenarios 27

Key Definitions and Terms 28

Fraud Risk Structure 30

Classifying Fraud 32

Identifying Fraud Scenarios 41

Fraud Audit Considerations 46

Summary 51

Chapter 4: Brainstorming: The Implementation of Professional Standards 53

What Is Brainstorming? 54

When to Brainstorm 56

Summary 66

Chapter 5: Assessment of Fraud Likelihood 69

Preparing a Fraud Risk Assessment 69

Summary 81

Chapter 6: Building the Fraud Audit Program 83

Traditional Audit versus the Fraud Audit 84

Responding to the Risk of Fraud 84

A Fraud Audit Program 85

Testing Procedures 89

Fraud Concealment Effect on the Audit Response 97

Audit Evidence Issues 103

Fraud Scenario Examples 105

Summary 110

Chapter 7: Data Mining for Fraud 111

The Art and Science of Data Mining 112

Strategies for Data Mining 129

Limitations of Data Mining 131

Summary 132

Chapter 8: Fraud Audit Procedures 133

Basis of Fraud Audit Procedures 133

Levels of Fraud Audit Procedures 135

Design of Fraud Audit Procedures 138

Summary 145

Chapter 9: Document Analysis 147

Document Analysis and the Fraud Audit 148

Levels of Document Examination 148

Document Red Flags 150

Brainstorming Sessions and Document Red Flags 155

The Fraud Audit Program and Document Red Flags 156

Summary 156

Chapter 10: Disbursement Fraud 159

Fraud Risk Structure 159

Audit Approaches 166

Summary 178

Chapter 11: Procurement Fraud 179

Fraud Risk Structure 181

Audit Procedures 195

Summary 202

Chapter 12: Payroll Fraud 205

Fraud Risk Structure 206

Audit Procedures 212

Summary 222

Chapter 13: Revenue Misstatement 223

Fraud Risk Structure 224

Audit Approach 231

Summary 236

Chapter 14: Inventory Fraud 237

Fraud Risk Structure 238

Audit Procedures 243

Summary 249

Chapter 15: Journal Entry Fraud 251

Fraud Risk Structure 252

Audit Procedures 261

Summary 266

Chapter 16: Program Management Fraud 269

Fraud Risk Structure 270

Audit Approach 277

Summary 282

Chapter 17: Quantifying Fraud 283

Conveying the Impact to Management 284

Role of Evidence in Calculating a Fraud Loss 287

Impact on the Fraud Audit 289

Options for Management 292

Case Studies 293

Summary 296

Appendixes 297

Appendix A 298

Appendix B 311

Appendix C 325

Appendix D 339

Appendix E 347

Appendix F 360

Appendix G 363

About the Author 365

Index 367