Audit Resources

Report Writing

The Seven Deadly Sins of Report Writing by Joanne Feierman

Seminars in Communication (www.seminarsincommunication.com)

Research Links

The following links are research resources generally utilized by Internal Audit in planning and performing audits.

Northwestern State

Report Writing

The Seven Deadly Sins of Report Writing by Joanne Feierman

University of Louisiana System

State

Federal

Professional

Glossary

Content coming soon.

Fraud Awareness

Fraud Defined

Fraud encompasses an array of irregularities and illegal acts characterized by intentional deception. It usually involves the deliberate concealment of facts. Fraud can be defined in a number of ways, including the following:

Fraud is the intentional misrepresentation or concealment of a material fact that results in financial or other damages to another party.

Fraud is the use of deception, false suggestions, suppression of the truth, or other unfair means, which is believed and relied upon to deprive another of property or money, resulting in a loss to the party that believed and relied upon such.

Fraud is an illegal act characterized by deceit, concealment or violation of trust committed by individuals and organizations to obtain money, property or services, avoid payment or loss of services, or to secure personal or business advantage.

Fraud is the intentional deception perpetrated by individuals or organizations, either internal or external to the organization, which could benefit themselves, others, or the organization or which could cause detriment to others or the organization, including falsifying financial or other records to cover up the theft of money or other assets.

Characteristics of Fraud

Regardless of the definition used, certain characteristics are common to fraud, including:

Misrepresentation of a material fact

Made knowingly and with the intent to deceive
Reliance on the misrepresentation by the victim
Resulting in injury or damage from such reliance

The perpetrator’s intent to deceive is usually the hardest element of a fraud to prove. The following are examples which have been used to prove an intent to deceive:

Admissions

Alteration of documents
Concealment of evidence
Confessions
Destruction of evidence
False statements (lies)
Obstruction of justice
Pattern of conduct (repetition of behavior)
Personal gain
Testimony of a co-conspirator

“Ordinary” people commit frauds. Typically, the “ordinary” person has a “pressure” in his/her life (e.g. financial crisis, large gambling debts, or high medical bills). Then, he/she seizes a perceived “opportunity” to alleviate the pressure (e.g. the combination is taped to safe’s door, or no one ever reviews my work). Afterwards, he/she rationalizes the fraud he/she committed (e.g. they don’t pay me enough, I’ll pay it back, or I deserve a raise).

Examples of Fraud

Altering documents (changing an actual document), including cash receipts, checks, expense reports, and time sheets

Alumni Affairs / Development

Keeping gifts

Overstating amounts of gifts received

Athletics

Athlete eligibility Camps

NCAA compliance

Ticket sales

Travel

Bribery

Conspiracy

Disbursements

Create fake vendors to receive payments

Inflate check amounts to payees

Kickbacks

Embezzlement

Equipment

Improper sale of

Personal use of

Theft

Falsifying documents (creating a fictitious document), including cash receipts, checks, expense reports, and time sheets

Forging signatures on documents, including cash receipts, checks, expense reports, and time sheets

Grants and Research

Improper charges to

Keeping research checks

Intellectual Property (creations of the mind, such as patents, copyrights, and trademarks)

Conflict of interest

Improper sale of

Theft

Inventory

Theft of inventory items

Theft of scrap or surplus

Misappropriation of assets, including cash, equipment, property, and supplies

Outsourced Activities

Understating sales

Gifts to management and other personnel Overstating inventory

False accounting records

Payroll

Creating fictitious employees

Inflating hours worked (padding the payroll)

Keeping former employees on the payroll

Theft of time

Purchasing

Bid rigging

Kickbacks

Purchase of inferior products

Purchase of personal items

Theft of assets, including cash, equipment, property, and supplies

Use of State property for personal gain

Fraud can be very expensive in terms of monetary losses, loss of public trust, negative publicity, and potential litigation. It is very difficult to quantify the monetary losses associated with fraud, because not all fraud is known about. As such, it is imperative that all employees strive toward the prevention of fraud at the University.

High Risks Fraud Areas

Certain areas and transaction types are more susceptible to fraud than others, having an above average potential for fraud to exist. Examples of such areas and transaction types are as follows:

Asset acquisitions
Cash handling and collection points
Computer and telecommunication access
Construction
Consultants
Credit card usage
Decentralized organization
Disbursements / payables
Employee loans
Employee payroll
Freight
Inventory
Purchasing
Remote locations
Revenue recognition
Student loans
Student payroll
Surplus or scrap material
Suspense accounts
Temporary or casual employees
Third party contracts
Ticket sales
Travel
Vendor relationships

Fraud Related Terms

Asset misappropriations – The theft or misuse of an organization’s assets

Bribe – A payment made to influence someone to do something that should not be done or to omit to do something that should be done under the rules governing the procurement

Check tampering – A disbursement fraud scheme whereby an individual either prepares a fraudulent check for his own benefit or intercepts and cashes a check intended for a third party

Collusion – A secret agreement between two or more parties for fraud or deceit

Conspiracy – Is an agreement by two or more individuals to commit an unlawful act, or to commit a lawful act for unlawful purposes or by unlawful means

Corruption – A fraud in which perpetrators wrongfully use their influence in a business transaction in order to obtain some benefit for themselves or another person, including kickbacks, other gifts and gratuities, or engaging in conflicts of interest

Embezzlement – To take assets in violation of trust

Forgery – The false making or altering, with the intent to defraud, of any signature to, or any part of, any writing purporting to have legal efficacy; Issuing or transferring, with the intent to defraud, a forged writing, known by the offender to be a forged writing, shall also constitute forgery

Kickbacks – Any money, fee, commission, credit, gift, gratuity, thing of value, or compensation of any kind that is provided for the purpose of improperly obtaining or rewarding favorable treatment in connection with a contract. This prohibition extends to members of the employee’s immediate family.

Kiting – Drawing a bank check on insufficient funds to take advantage of the time interval required for collection

Lapping – A scheme to cover an embezzlement by using payments made by one customer to reduce the account balance of another customer, i.e. recording a payment on a customer’s account sometime after the payment has been received

Larceny – The intentional taking away of an employer’s cash (currency and checks) without the consent and against the will of the employer, involving the theft of money that has already appeared on a company’s books, i.e. “on-book” fraud

Skimming – The process by which cash is removed from the company before it enters the accounting system, including unrecorded sales, understated sales, theft of incoming checks, and swapping checks for cash, i.e. is an “off-book” scheme because the receipt of cash is never reported to the company

Theft – The misappropriation or taking of anything of value which belongs to another, either without the consent of the other to the misappropriation or taking, or by means of fraudulent conduct, practices, or representations (an intent to deprive the other permanently of whatever that was misappropriated or taken is essential)

Best Practices

Efficiency and Effectiveness

Goals and objectives obtained in an defined and timely manner using minimal resources can result in efficient operations. Inefficiencies occur when processes are performed that provide no additional benefit or value. Operations are considered effective when they are functioning as intended and produce the desired result. If two individuals are both responsible for executing the same function within a process, a duplication of efforts would exist. This is an inefficient and ineffective use of time and resources.

Best Practices:

Analyze business processes and identify and eliminate duplicated efforts;
Streamline processes by reducing an non-value added procedures;
Identify any processes that have been done merely because “that’s the way we’ve always done it”. Determine if those processes are still needed. If they are, identify methods that would allow steps to be completed either more timely or effectively;
Strive to process documents and transactions in a minimum required time to increase the efficiency and effectiveness of the department;
Employ a cost-benefit methodology when analyzing and developing new processes. If the costs outweigh the benefits, then consider eliminating the procedures or reduce the number of steps needed to complete the process;
Look for more innovative ways to accomplish goals and objectives; and
Automate where possible.

Policies and Procedures

Written policies and procedures establish management’s criteria for executing the university’s operations. Developing and documenting policies and procedures is the responsibility of management. Management should document business processes, personnel responsibilities, departmental operations, and promote uniformity in executing and recording transactions. Thorough policies and procedures serve as effective training tools for staff and faculty. If written policies and procedures do not exists, are inaccurate, incomplete, outdated, irrelevant, not written succinctly, and/or not communicated; the following could result:

Inconsistent practices among employees and/or departments
Processing errors due to a lack of knowledge
Inability to enforce employee accountability

Best Practices:

Document all significant all significant business practices, processes, and policies;
Effectively communicate new policies and procedures to personnel;
Ensure policies and procedures are accurate, complete and current at all times;
Revise policies and procedures for changes in business processes and policies. This is important when new systems are developed and implemented or other organizational changes occur;
Communicate significant changes to all affected personnel to ensure they are aware of any revisions to their daily duties and responsibilities; and
Policies and procedures are only effective if people are aware and understand them.

Segregation of Duties

Segregation or separation of duties involves ensuring that staff members do not perform incompatible duties. The following responsibilities should be assigned to different individuals:

Authorization
Custody of Assets
Recording of Transactions

Separation of the above duties reduces the opportunities for any individual to both perpetrate and conceal errors or fraud in the normal course of duties such as the following:

Misappropriation of Assets
Misstated financial statements
Inaccurate financial documentation
Improper use of funds
Modification or manipulation of data or records

Best Practices:

A system should be designed that the work of one individual provides a crosscheck on the work of another individual (reduce opportunity); and
One individual should not perform a process from the beginning to the end. For example: one person should not be able to accept cash, record deposits, make the deposit and reconcile the account.

Compensating Controls

Compensating Controls are less desirable then separation of duties because they generally occur after the transaction is complete. Relying completely on compensating is less desirable because it takes more resources to investigate and correct errors, and recover losses, than it does to prevent them. However, in some circumstances, departments do not have the staff resources to establish adequate separation of duties, so they have no choice in the matter. In these instances it is important for management to implement controls that compensate for the increased risk. Following is a list of the types of compensating controls a department can implement to address not having adequate separation of duties. This can be a valuable reference as well as a potential cost savings in the audit process when a control is more expensive to implement and test that it’s compensating control counterpart.

Review Reports of Detail Transactions Charged to the Department – At a minimum, managers who have a staff member who can perform all the key activities of a transaction with no segregation of duties should be reviewing the reports of detail transactions for their department on a monthly basis to identify, investigate, and correct improper charges. An adequate review would consider the transaction date, vendor, description, dollar amount, and offset account, if any. Keep in mind that this review cannot be delegated to staff who can perform all the key activities of a transaction, as it would defeat the effectiveness of this compensating control.
Review Reports of Detail Transactions Initiated by the Person who Can Perform All the Key Activities of a Transaction – A manager can periodically pull and review a report that identifies all the transactions created by staff who can perform all the key activities of a transaction. An adequate review would look at purchase dates, vendor name, description of transaction, ship to location, and the departments charged, to identify, investigate and correct improper transactions.
Pull Sample of Transactions – A manager can periodically pull and review the supporting documents for a sample selected from transactions charged to his/her department. An adequate review would address the same data as are covered under ‘Review Reports of Detail Transactions’.
Take Periodic Asset Counts and Compare to Accounting Records – If a department purchases a significant amount of equipment or other tangible assets, it may be effective to conduct periodic counts and compare to inventory records to ensure equipment and supplies are on-hand.
Prepare Budget Analysis and Cost Trends: Investigate Discrepancies – A less effective compensating control is the preparation and/or review of budget and trend analysis of expenditures. While this does not provide the specific detailed review, it can be a way to identify problem areas where further detailed review needs to take place.

Safeguarding Assets

Assets are the economic resources the State owns that are expected to be of benefit in the future. Examples are cash, office supplies, merchandise, furniture, equipment, land, buildings and sensitive or confidential data. Protective measures must be taken to ensure that assets are maintained in a properly controlled and secured environment. The most important type of protective measure for safeguarding assets is the use of physical controls. If physical controls are not in place the following could occur:

Theft
Items may be lost or misplaced
Fraud may be committed using the unauthorized data
Unauthorized transactions or processing could occur if data is not adequately safeguarded

Best Practices:

Lock doors to unoccupied offices, storage or other rooms and buildings;
Cash should be stored preferably in a fire-proof safe;
Restrict access to data and other assets to a limited number of individuals within the department;
Ensure proper access controls are in place in systems. User ID’s are unique and passwords are forced to be changed frequently by the system;
Issue Master keys only to persons with a legitimate need; and
Perform periodic counting and comparison of actual assets with amounts shown in accounting records.

Review and Approval

When a process is performed within a department, there should always be another level of review and approval performed by a knowledgeable individual independent of the process. The approval should be documented to verify that a review was performed. Review and approval are controls to help management gauge whether operational and personnel goals and objectives are being met. The lack of or inadequate review and approval could result in the following:

Errors may be overlooked resulting in misstatements that could affect financial, as well as, operational decisions
Inaccurate or incomplete information in accounts and reports
The inability to detect irregularities and/or errors

Best Practices:

A thorough review of processes, transactions, and reports should be performed for accuracy, completeness, and timeliness;
The reviewer should be someone who is knowledgeable about the items or areas being performed such that they are able to identify errors or omissions;
The reviewer should preferably be someone who has the authority, who is able to authorize, provide direction, and make decisions about the items under review;
The reviewer should be someone who does not perform the process; and
Evidence of the review and approval should be documented; signed and dated by the reviewer.

Timeliness

Timeliness means meeting the arranged deadlines. By failing to meet deadlines the following events could occur:

Inefficiencies
Legislative audit findings
Fines or penalties could be imposed
Operational processes could be negatively impacted

Timeliness is an area where all employees can analyze their work-flows and identify ways to work smarter and save time.

Best Practices:

Obtain an understanding of all the required deadlines particularly those that are invariable such as regulatory due dates;
Prioritize activities when critical deadlines are pending;
Ensure adequate resources are available, staff trained, and are able to complete the obligations;
If deadlines cannot be met, notify the appropriate parties in advance and document and retain the communication. Confirm a new date and meet the obligation.

Monitoring

Monitoring is the process that assesses the quality of internal control performance over time, by assesing the design and operation of controls (such as policies and procedures) on a timely and continious basis and taking corrective action if necessary. Establishing and maintaining internal control is a responsibility of management. Management must monitor controls to determine whether they are operating as intended or whether the controls should be modified to produce the University’s desired outcome. Failure to monitor controls and process could result in:

Inability to force employee accountability
Undetected errors or irregularities
Inability to assess the effectiveness and efficiency of operations, programs or projects
Violations of laws, regulations, and policies

Best Practices:

Management should implement an ongoing monitoring activity into the normal recurring activities;
Evaluate and review progress to identify inefficiencies, ineffectiveness, duplicative processes, and determine if adjustments should be made; and
Make adjustsments to improve results and to ensure desired outcomes.