Fraud Risks

During an advisory engagement to help a city council design a new purchasing card process, an internal auditor sees that the draft design lets cardholders approve their own monthly statements. Management did not ask for a fraud review. What should the auditor do?

While planning an operational engagement on a retailer's store refurbishment program, an internal auditor learns of an anonymous allegation that the program manager favors one contractor. The allegation has not been investigated. What should the auditor do first?

Analytical review at a clothing retailer shows that one store's gross margin rose from 38% to 47% in a year when all other stores fell slightly, while its inventory grew sharply relative to its sales. What possibility should the auditor consider most closely?

A retailer's policy limits buyers to purchase orders of $25,000, but an internal auditor finds that the purchasing system lets any buyer release an order of any value. Several orders above $25,000 were released without further approval. What should the auditor recommend as the most effective fix?

A bank checks the employment history, references and any criminal record of applicants for roles that handle cash or customer data. What kind of fraud control is this?

An internal auditor wants to test a large set of expense claims by comparing how often each leading digit appears with the frequency expected in naturally occurring data. Which technique is this?

A sales division's managers earn large bonuses only if quarterly revenue targets are met, and the division narrowly missed its targets for the last two quarters. In an engagement on the division's revenue process, where should the auditor direct extra attention?

Before fieldwork on a manufacturer's procurement process, the engagement team meets to discuss how someone inside or outside the company could commit fraud in the process and hide it. What is the main purpose of this session?

At a supermarket, all sales are rung through the tills and recorded correctly. Each evening a supervisor prepares the bank deposit and removes some notes before sealing the bag, so the deposit is less than the recorded takings. Which scheme does this describe?

A hospital's head of pharmacy owns half of a drug wholesaler and did not disclose it. She has directed most of the hospital's purchases to that wholesaler, whose prices are close to market rates. In which main category of occupational fraud does this fall?

An internal auditor suspects that some vendors at a construction company have been paid twice for the same work, possibly with altered invoice numbers. Which test would best detect this?

Internal audit needs to examine the laptop of an employee suspected of diverting customer payments. What is the best way to examine the data?

An audit of a city government's payroll finds salary paid every month to a person with no badge access records, no manager who knows her, and a bank account shared with a payroll officer. Which scheme does this most likely indicate?

An internal auditor at a national charity is choosing where to focus fraud procedures. Which activity has the greatest exposure to misappropriation?

An internal auditor is conducting an information-gathering interview with a warehouse clerk who is a witness, not a suspect. How should the questions usually be structured?

Why should two investigators normally be present when a person suspected of fraud is interviewed?

The audit committee of a shipping company asks internal audit to investigate a suspected fraud involving complex trade finance and deleted electronic records. No one on the internal audit staff has forensic accounting or digital evidence skills. What should the chief audit executive do?

A receivables clerk at a wholesaler steals a check received from one customer. A week later she applies a second customer's payment to the first customer's account, and later uses a third customer's payment to cover the second. Which scheme is she using to conceal the theft?

An internal auditor at a listed company is assessing fraud potential at the entity level. Which condition is the strongest organizational red flag for financial statement fraud?

A forensic firm has completed an investigation into a travel expense fraud at a technology company, and the employee has left. What is internal audit's most valuable contribution now?

An internal auditor is ranking procurement risks at a public transport agency. Which condition gives the process the greatest exposure to fraud?

Which of the following is a behavioral red flag that an employee may be committing fraud?

An internal auditor finds several fraud red flags in a payroll process. What does the presence of these red flags establish?

An accounts receivable clerk at a wholesaler has not taken leave in three years, comes in when ill, and refuses offers from colleagues to post receipts while she is busy. Why should an internal auditor treat this as a red flag?

During an engagement on payments at a chain of dental clinics, an auditor finds a vendor that has only a post office box address, no phone number and no tax number on file, and whose bank account was added by a payables clerk last year. What is the most likely concern?

During an engagement on a hospital's supplies process, an internal auditor finds several altered delivery notes and a pattern suggesting a storekeeper may be stealing medicines. What should the auditor do next?

Internal audit finds evidence suggesting that the chief financial officer of a charity has been approving payments to a company owned by his partner. The chief executive and the chief financial officer are close friends. To whom should the chief audit executive communicate the matter?

A facilities manager at a university registers a company in his brother's name, submits invoices from it for cleaning services that were never performed, and approves them himself. Which scheme is this?

A distributor has separated ordering, receiving and payment among three employees. What is the main limitation of this control as a defense against fraud?

An internal auditor wants to test whether a museum's petty cash custodian is taking money from the fund. Which procedure is best?

A university moved its accounts payable to a new system three months ago. During migration, several finance staff were given broad access that has not yet been removed. How should this affect the planned engagement on accounts payable?

The chief executive of a construction firm often tells staff to skip the procurement rules when a project is running late, and openly approves contracts without the required bids. What is the most likely effect on fraud risk across the firm?

The audit committee of a manufacturer asks which element of the fraud triangle the organization can influence most directly through the design of its internal controls. What should the chief audit executive answer?

A hospital billing clerk tells a colleague that the hospital has refused staff pay rises for three years, so moving small refunds into her own account is only taking back what she is owed. Which element of the fraud triangle does her remark show most directly?

A training course explains why otherwise honest employees commit fraud using the fraud triangle. Which three conditions does the fraud triangle describe?