Fraud Examination, 3E
Chapter 5: Recognizing Symptoms of Fraud
COPYRIGHT © 2009 South-Western, a part of Cengage Learning
Learning Objectives
• Understand how symptoms help in the
detection of fraud.
• Identify and understand accounting
symptoms of fraud.
• Describe internal controls that help detect
fraud.
• Identify and understand analytical
symptoms of fraud.
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Learning Objectives
• Explain how lifestyle changes help detect
fraud.
• Discuss how behavioral symptoms help
detect fraud.
• Recognize the importance of tips and
complaints as fraud symptoms.
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Symptoms of Fraud
Can be separated into six groups:
1. Accounting anomalies
2. Internal control weaknesses
3. Analytical anomalies
4. Extravagant lifestyle
5. Unusual behavior
6. Tips and complaints
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Accounting Anomalies
Common anomaly frauds involve:
• Irregularities in source documents
• Faulty journal entries
• Inaccuracies in ledgers
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Internal Control Weaknesses
Internal control fraud symptoms include :
• 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
• Inadequate accounting system
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Analytical Fraud Symptoms
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Analytical Fraud symptoms include:
• Unexplained inventory shortages or
adjustments
• Deviations from specifications
• Increased scrap
• Excess purchases
• Too many debit or credit memos
• Significant increases or decreases in
account balances, ratios, or relationships
• *See the book for more
Extravagant Lifestyles
Example
Kay…
• Embezzled $3 million from her employer
• Bought a $500,000 or more home
• Bought five luxury cars
• Filled home with artwork and glass
• Bought a boat
• Paid cash to have yard landscaped
• Served lobster flown in from the east coast
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Unusual Behaviors
Guilt
Fear
Stress
Behavior
Changes
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Insomnia
Increased drinking
Taking drugs
Unusual irritability and suspiciousness
Inability to relax
Lack of pleasure in things usually enjoyed
Fear of getting caught
Inability to look people in the eyes
Showing embarrassment around friends,
co-workers, and family
Defensiveness or argumentativeness
Unusual belligerence in stating opinions
Confessing (either to a religious leader,
psychologist, or other professional)
Obsessively contemplating possible
consequences
Working standing up
Sweating
Increased smoking
Tips and Complaints
Who is in the best position to recognize fraud
in each of these elements—Auditors or
Company Employees? Company Employees
The Fraud Element Triangle
Theft Act
Concealment
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Conversion