Is your organization facing Frauds threats? Below are quick transactions tests that if executed with precision may unearth these frauds. If not, but continue doing them regularly, you may scare away fraudulent activity in your organization.
There are many frauds test that can be carried out but I will focus on the following 3 major ones that we can do to detect fraud namely:
- Purchase Frauds
- Payroll Frauds and
- Management override of controls review
Below is a description of each of them and how we may execute them.
1. Purchase Frauds
Purchase fraud is probably the most common type of fraud in an organization. It may be the simple submission of a dummy invoice, the re-use of another valid invoice, the withholding of a credit note, or a more complex arrangement. Many frauds involve the manipulation of the payments information on personal accounts within the Accounts Payable system.
Testing for Purchase Fraud Procedures:
There are 5 different tests that we can test for purchase frauds. The following are the files we need to perform these tests:
a. Supplier Master File: The supplier master file contains names and addresses and usually additional information such as contact telephone numbers, bank account details, and alternative addresses which we require in this type of test.
b. Employees Personnel Records: This should show names and addresses and usually additional information such as contact telephone numbers, bank account details etc.
a.) Match supplier names against a list of employee names (primary key) from a payroll or personnel file.
b.) Examine purchase ledger transactions for entries at or just below the approval level of managers. If the computer system captures the approving authority for a transaction, examine the value distribution for each manager.
c.) Examine to see if amounts are being approved at or just below, break points in authority level by a value distribution across the whole ledger. If approval authority is not directly available, perform subsidiary analysis by types of supplier or approving department.
d.) Look for split invoices to enable approval to be kept by an individual. Extract all invoices within 90 percent of an approved limit (preferably for a suspected manager or department) and search for all invoices from that supplier. Index by approving manager, department and date to identify possible split invoices or summarize payments by invoice number to determine how many part-payments have been made for each invoice.
e.) Test for duplicate invoices using value and supplier code as the key fields for one test and purchase order number for another.
2. Payroll Frauds
Payroll frauds are one of the most common types of fraud committed. Often a fictitious or ”ghost” employee is set up on a salary system with payments following automatically. This is particularly true in the case of electronic payments into bank accounts where no checks need to be collected. Other common ways to defraud a payroll system are by not removing leavers (terminations), then channeling their pay into another bank account, or by submitting excessive overtime, expense, or allowance claims.
There are 3 different tests that we can test for payroll frauds. The following are the files we need to perform these tests:
a. Payroll transactions file: This should show names and addresses and usually additional information such as contact telephone numbers, bank account details etc.
b. Employees Personnel Records: This should show names, SSN etc
Test for duplicates
a.) Test for duplicate employees on the entire payroll file, using the employees’ Social Security Numbers as a unique employee identifier.
b.) Check for duplicate bank accounts. This test may report family accounts where more than one member of a family is employed by the organization. However, these can be eliminated from the list of duplicates leaving the fraudulent items.
a.) Match master information from the payroll file with the organization’s personnel file to determine whether there are ”ghost” employees on the payroll.
b.) Compare the payroll file at two dates, for example the beginning and the end of a month, to determine whether recorded starters and leavers (hires and terminations) are as expected and if any employees have received unusually large salary increases.
a.) Ensure each employee’s salary is between the minimum and maximum for his/her position or grade. Test also the reasonableness of allowances to position or grade.
b.) Investigate excessive overtime and allowance claims to ensure there has been no over-claim.
c.) Compare holidays and sick leave taken to the limits for a particular grade or position, and if there is a high rate of absenteeism for sickness this could be analyzed by department to identify problem areas.
d.) Evaluate the reasonableness of tax codes and compare changes in tax code over a period.
Below is an additional audit procedure that may be expanded:
3. Management Override of Controls Review
a.) Examine journal entries and other adjustments for evidence of possible material misstatements due to fraud. For example non standard or unusual entries.
b.) Evaluate the business purpose for significant unusual transactions. Such as very complex transactions or those where the accounting does not reflect the underlying substance of the transaction.