Fraud Auditing and Forensic Accounting

338 Pages·2006·1.99 MB·English

by  Tommie W. Singleton

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Fraud Auditing
and Forensic
Accounting
Third Edition
TOMMIE SINGLETON
AARON SINGLETON
JACK BOLOGNA
ROBERT LINDQUIST
John Wiley & Sons, Inc.

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Fraud Auditing
and Forensic
Accounting
Third Edition
TOMMIE SINGLETON
AARON SINGLETON
JACK BOLOGNA
ROBERT LINDQUIST
John Wiley & Sons, Inc.
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This book is printed on acid-free paper. ∞
Copyright © 2006 by John Wiley & Sons, Inc. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data
Fraud auditing and forensic accounting.— 3rd ed. / Tommie Singleton ... [et al.].
p. cm.
Rev. ed. of: Fraud auditing and forensic accounting / G. Jack Bologna, Robert J.
Lindquist. 2nd ed. c1995.
Includes index.
ISBN-13: 978-0-471-78591-0 (cloth)
ISBN-10: 0-471-78591-1 (cloth)
1. White collar crime investigation—United States. 2. Forensic accounting—United
States. 3. Fraud investigation—United States. I. Singleton, Tommie. II. Bologna, Jack.
Fraud auditing and forensic accounting.
HV8079.W47F73 2006
364.16'3—dc22
2006007381
Printed in the United States of America
10 9 8 7 6 5 4 3 2 1
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Contents
PREFACE vii
ACKNOWLEDGMENTS ix
CHAPTER 1
Fraud Definitions, Models, and Taxonomies 1
Introduction 1
Classic Fraud Research 6
Fraud Triangle 8
Scope of Fraud 12
Profile of Fraudsters 14
Who Is Victimized by Fraud Most Often? 18
Fraud Taxonomies 19
Evolution of a Typical Fraud 28
Chapter 2
Fundamentals of Fraud Auditing and Forensic Accounting 33
Introduction 33
Brief History of Fraud and the Antifraud Profession 35
Review of Technical Literature 40
Auditor’s Mind-Set 42
What Is Forensic Accounting? 43
Steps in Fraud Investigation 52
What Is Fraud Auditing? 55
Antifraud Professional Organizations and Certifications 71
Summary 72
CHAPTER 3
Auditor Liability for Detecting Fraud 75
Introduction 75
Recent Developments in Auditor Liability 91
Summary 96
iii
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iv CONTENTS
CHAPTER 4
Fraud Schemes 99
Introduction 99
ACFE Fraud Tree 101
Financial Statement Schemes 108
Corruption Schemes 111
Asset Misappropriation Schemes 113
Summary 122
CHAPTER 5
Red Flags and Fraud Detection 125
Introduction 125
Professional Standards 126
Common Red Flags 127
Common Detection Methods 129
Specific Red Flags and Detection Methods 131
Corruption Schemes 134
Asset Misappropriation Schemes 135
Fraud Detection Model 147
Summary 153
CHAPTER 6
Fraud and CAATs 155
Introduction 155
Benefits of CAATs 156
Fraud and CAAT Issues 158
Need for Computer Tools 159
Sample Tools/CAATs 161
CAAT Methodology 164
Summary 173
CHAPTER 7
Fraud Prevention and Control 175
Introduction 175
Perception of Detection 175
Classic Approaches 178
Prevention Environment 180
Prevention Measures 183
Accounting Cycles 187
Summary 190
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Contents v
CHAPTER 8
Fraud Risk Assessment 191
Introduction 191
Risk Assessment Process and Documentation 196
Risk Management Checklists and Documentation 198
Special Cases 207
Summary 209
CHAPTER 9
Fraud and the Accounting Information System 211
Introduction 211
Accounting Concepts 212
Expenditures Cycle (Purchases and Disbursements) 213
Bank Reconciliation 214
General Ledger 215
Cash Path 218
Segregation of Duties 218
Computerized Accounting Systems 218
Key Personnel 219
Computer Hardware 224
Computer Software 226
Media Storage 227
New Forms of Media 228
Paper and Microfilm 229
Audit Trail Concept 229
CHAPTER 10
Computer-Related Fraud 231
Introduction 231
History and Evolution of Computer-Related Crimes 233
Computer-Related Fraud Theories and Principles 236
Characteristics of the Computer Environment 240
Information Security (InfoSec) 242
Profiling Internet Fraudsters 245
Summary 252
CHAPTER 11
Forensic Accountant as an Expert Witness 255
Introduction 255
Role of a Forensic Accountant as a Witness in Court 255
Forensic Accountant as an Expert Witness 262
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vi CONTENTS
Qualification and Admissibility of Accounting Evidence 265
Expert’s Role in the Litigation Team 267
Pretestimony Activities 267
Trial and Testimony 269
Summary 279
Appendix 11A 279
CHAPTER 12
General Criteria and Standards for Evaluating an Expert’s Qualifications 283
Introduction 283
Credentials 283
Personal Qualities of the Expert 290
Sources for Locating Expert Witnesses 294
Distinguishing the Actual Area of Competence 296
Summary 297
CHAPTER 13
Gathering Evidence 299
Introduction 299
Rules of Evidence 299
Hearsay Exceptions 303
Other Rules of Evidence 304
Index 315
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Preface
White-collar crime is rampant, and has been for some time, in the
business community of the U.S. economy. Experts have estimated
that the costs of white-collar crime averages about 20 times the costs
of street crimes each year. The Association of Certified Fraud
Examiners (ACFE) estimated that fraud cost the U.S. economy $660
billion in 2004. But white-collar crime has taken a backseat to street
crime in terms of media coverage and focus. That is, until Enron,
white-collar crimes tended to be overlooked. We hope the hype that
has occurred in recent years will continue to bring attention and
focus to fraud, and thus help to diminish the costs and occurrences of
fraud in the years ahead.
The attention and focus on the major financial fraud scandals led
to the passage of the Sarbanes-Oxley Act (SOX) in July 2002 and
the adoption of Statement on Auditing Standard (SAS) No. 99,
Consideration of Fraud in a Financial Statement Audit, in December
2002. This edition brings this book up to date by discussing these
and other recent events. We have also extended the discussion about
fraud schemes and included more about computer-assisted audit
tools (CAATs) and other technological aspects of fraud auditing and
forensic accounting.
Primarily, this book deals with fraud of an accounting nature. It
deals with fraud from the perspective of how forensic accountants can
investigate and document such crimes, how internal and external
auditors can detect them, how police and security specialists can
investigate them, and how good management practices can help pre-
vent and detect them. Our goal in revising this book was to contribute
to the literature of auditing, investigation, and forensics. We hope this
vii
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viii PREFACE
edition extends the awareness of the meaning and value of fraud
auditing and forensic accounting and contributes to the effectiveness
of those in the antifraud profession.
August 2006
Tommie Singleton
Aaron Singleton