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Fraud Examination #366626

Course Overview

Credit

Amount

CPA

Course Author: Steven M. Bragg, CPA Field of Study (CPA): Accounting

Course Description

Course publication/revision date: This course was updated on 5/17/2025.

This course is a practical reference for how to prevent, detect, and investigate fraud within a business. It can be used to identify the different types of fraud, as well as to construct an environment in which fraud is minimized. In addition, it describes the many indicators of fraud, so that it can be detected early. The course also describes the process for investigating fraud, including interviewing techniques, document examination, and how to write a fraud report. In short, Fraud Examination is an essential tool for anyone interested in how fraud is perpetrated and how to conduct an investigation when fraud is suspected.

Table of Contents

Chapter 1 - Introduction to Fraud1

What is Fraud?	1
Confidence	2
The Effects of Fraud	2
Fraud Triggers	3
Perceived Pressure	3
Opportunity	4
Rationalization	5
Fraud Addiction	6
Collusion	6
Types of People More Likely to Engage in Fraud	6
Types of Fraud	7
Financial Statement Fraud	7
Embezzlement	7
Supplier Fraud	7
Customer Fraud	8
Investment Scams	8
Common Fraud Risk Indicators	9
Responsibility for Fraud Prevention	10
The Fraud Examiner	10

Chapter 2 - Fraud and Theft Schemes13

Cash Theft	13
Disbursement-Related Theft	15
False Expense Reports	15
Mis-use of Company Credit Card	15
Billings from Fake Suppliers	16
Self-Insurance Fraud	16
Unauthorized Shipments	16
Redirected Payments	16
Check Theft	16
ACH Debits	17
Compensation Fraud	17
Executive Loans	17
Workers' Compensation Fraud	18
Check Kiting	18
Solicitations Disguised as Invoices	19
Lapping	19
Inventory Theft	19
Product Replacement Fraud	20
Fixed Asset Theft and Misuse	20
Bust-Out Scams	21
Advance-Fee Loan Schemes	21
Kickbacks	21
Bid Rigging	22
Bribery	22
Conflicts of Interest	22
Insider Trading	23
Stock Option Backdating	23
Information Theft	24
Time Theft	24
Money Laundering Schemes	24
Nominee Schemes	25
Business Cover Schemes	26
Cashier's Check Schemes	27
Asset Purchase Schemes	27
Financial Statement Fraud Schemes	27
Sales Inflation	27
Expenses Falsification	29
Marketable Securities Falsification	30
Prepaid Expenses Falsification	30
Receivables Falsification	30
Loss Reserves Falsification	31
Inventory Falsification	32
Fixed Asset Falsification	33
Liability Falsification	33
Debt Falsification	35
Discontinued Operations Stuffing	35
Cash Flow Reclassifications	35
Acquisition Falsification	37
The Most Difficult Financial Statement Fraud Areas to Detect	37
Financial Statement Disclosure Fraud	38
Fraud Schemes More Common in Closely-Held Businesses	39

Chapter 3 - Financial Statement Fraud41

Reasons for Financial Statement Fraud	41
Instigators	42
How Financial Statement Fraud Begins	43
The Financial Statements	43
The Balance Sheet	43
The Income Statement	46
The Statement of Cash Flows	48
Interactions between the Financial Statements	50
Horizontal Analysis	51
Vertical Analysis	53
Interrelationships Analysis	55
Revenue Interrelationships	55
Revenue Acceleration Interrelationships	58
Cost of Goods Sold Interrelationships	58
Capitalization Interrelationships	59
Ratio Analysis	59
Financial to Non-financial Relationships	60
Time-Based Analysis	61
Other Red Flags	61
A Note of Caution	65
The Auditor's Approach	65
Other Factors to Consider	66
The Management Team	66
The Organizational Structure	67
The Size of the Organization	67
The Board of Directors	67
Footnotes	68
Industry Analysis	68

Chapter 4 - Fraud Prevention71

1. Combatting Perceived Pressure	71
2. Minimizing Fraud Opportunities	72
Cultural Adjustment Activities	72
Hire Correctly	72
Communicate Expectations	74
Provide an Example	75
Establish the Work Environment	75
Handle Fraud Situations Correctly	76
Minimizing Collusion	77
Engaging in Fraud Auditing Activities	77
3. Combatting Rationalization	78
Fraud Prevention for the Small Company	78
Fraud Prevention for Outsiders	78

Chapter 5 - Fraud Policies and Controls81

Policies	81
Control Activities	83
Segregation of Duties	83
Authorization Levels	84
Independent Reviews	84
Physical Safeguards	84
Documentation	84
Preventive and Detective Controls	85
Manual and Automated Controls	85
When to Add Controls	86
Control Overrides	86
Fraud-Specific Order Entry Controls	87
Fraud-Specific Credit Controls	87
Fraud-Specific Shipping Controls	88
Fraud-Specific Billing Controls	88
Fraud-Specific Cash Controls	89
Fraud-Specific Inventory Controls	91
Fraud-Specific Fixed Asset Controls	91
Fraud-Specific Payable Controls	92
Fraud-Related Purchasing Controls	95
Fraud-Related Receiving Controls	96
Fraud-Related Payroll Controls	96
Fraud-Specific Journal Entry Controls	98
General Controls	98
Oversight Capabilities	98
Incentive Systems	99
Small Business Controls	99

Chapter 6 - Fraud Detection102

Fraud Symptoms	102
Accounting Anomalies	102
Analytical Anomalies	104
Lifestyle Symptoms	106
Subcontractor Anomalies	106
Unusual Behavior	108
Assistance in Spotting Fraud	109
Assistance from Employees	109
The Employee Hotline	109
Assistance from Suppliers and Customers	110
Assistance from Auditors	110
Records Examination	110
Publishing Activities	110
Data Analysis	111
Data Analysis Techniques	112
Benford's Law	112
Cross-Matching Analysis	115
Outlier Analysis	115
Trend Analysis	116
Discovery Sampling	117
Access to Documents	118
Nonfraud Factors	118
Where Fraud Does Not Occur	118
Undetectable Fraud	119
Role of the Auditor in Fraud Detection	119

Chapter 7 - Fraud Investigation122

Whether to Investigate	122
Investigation Policies and Procedures	122
Fraud Investigative Techniques	123
Documentary Evidence	125
Personal Observation	125
Physical Evidence	125
Testimonial Evidence	126
Invigilation	126
The Need for Objectivity	127
The Need for Investigation Secrecy	127
Involving the Police	127
Signed Confessions	127

Chapter 8 - Investigation of Concealment and Conversion130

The Chain of Custody	130
Organizing the Evidence	130
Document Examination	131
Conversion and Incarceration Information Sources	131
National Crime Information Center	132
Interstate Identification Index	132
Federal Inmate Database	132
Tax Returns	132
State-Level Information	132
County-Level Information	133
Divorce Information	133
Probate Court Information	133
Professional Licensing Information	133
Rental Information	134
SEC Filings	134
Tax Assessor Information	135
Title Information	135
Voter Registration Information	135
Acquaintances Information	135
Trash Analysis	135
Fee-based Search Tools	135
Investigations Related to Mail Fraud	135
Calculating the Amount Stolen	136

Chapter 9 - Fraud Interviewing Techniques139

The Ideal Interviewer	139
Types of Interviewees	140
The Ideal Interview	140
Interview Planning	140
The Interview	141
Interactions with Friendly Interviewees	141
Interactions with Unfriendly Interviewees	143
Asking for an Admission of Guilt	144
Additional Interviewing Rules	149
Activities Following the Interview	149
Income Questions	150
Lifestyle Questions	150
Interviewee Motivations	150
Reactions to Fraud	150
Integrity Testing	151

Chapter 10 - The Fraud Report153

Report Tone	153
Sample Text of the Report	153

Chapter 11 - Legal Aspects of Fraud161

Types of Prosecution	161
The Civil Litigation Process	162
The Criminal Litigation Process	163
The Fraud Examiner Role in Lawsuits	163
Federal Statutes Covering Fraudulent Activities	164

Answers to Chapter Questions168

Glossary180

Index184

Course Details

Author: Steven M. Bragg, CPA

Steven Bragg, CPA, has been the chief financial officer or controller of four companies, as well as a consulting manager at Ernst & Young. He received a master’s degree in finance from Bentley College, an MBA from Babson College, and a Bachelor’s degree in Economics from the University of Maine. He has been a two-time president of the Colorado Mountain Club, and is an avid alpine skier, mountain biker, and certified master diver. Mr. Bragg resides in Centennial, Colorado. He has written more than 300 books and courses, including New Controller Guidebook, GAAP Guidebook, and Payroll Management.

Publication/Revision Date: 5/17/2025

Course Exam Questions (online): 60 (multiple-choice)

Program Delivery Method: NASBA QAS Self-Study

Available Formats of Course Text: PDF or PDF plus printed copy sent in the mail

Course Level, Prerequisites, and Advance Preparation Requirements

License	Course Level	Prerequisites	Advance Preparation Requirements
CPA	Overview	None	None

* This program is appropriate for professionals at all organizational levels.

Sponsor ID Numbers

National Registry of CPE Sponsors ID: 107615

State CPA Board Sponsor ID Numbers (where applicable)

Florida Division of Certified Public Accounting: 0004761

Hawaii Board of Public Accountancy: 14003

New York State Board for Public Accountancy: 002146

Ohio Accountancy Board: CPE .51 PSR

Pennsylvania State Board of Accountancy: PX178025

Texas State Board of Public Accountancy: 009349

Learning Objectives

As a result of studying the course material, you should be able to meet the objectives listed below:

Recognize the conditions under which fraud is most common.
Cite the types of rationalization used for committing fraud.
Specify the circumstances under which collusion is more likely to occur.
Specify the different types of fraud.
Identify the activities in which a fraud examiner may be engaged.
Specify the methods used to falsify expense reports.
Recognize the different types of fraud related to each functional area of a business.
Recognize the various techniques used to falsely modify the financial statements.
Identify the goal of mis-reporting cash flows.
Identify the positions most likely to be engaged in financial statement falsification.
Specify the formula used to construct a balance sheet.
Describe the order of liquidity concept.
Recognize the different types of analysis used to detect fraud.
Specify the inter-relationships among accounts and the financial to non-financial comparisons that can be used to find instances of fraud.
Recognize the methods available for reducing the perceived pressure on employees.
Identify the situations in which background checks should be used.
Identify the alternative responses to the discovery of fraud by an employee.
Cite the protective measures that an outside investor can use to protect himself against fraud.
Specify the policies most useful for preventing fraud.
Identify the uses to which the dual custody concept can be put.
Recognize the negative effects of installing controls.
Specify the different controls that can be used to specifically combat fraud.
Cite the indicators of a possible problem with a journal entry.
Specify the circumstances under which a shared services center is most useful.
Recognize those controls that are most useful in a smaller organization.
Cite the fraud risks associated with operating in an emerging market.
Identify the actions to take when searching for different types of fraud.
Specify the best practices for operating an employee hotline.
Recognize the concept underlying Benford’s Law.
Describe the circumstances under which a z-score can be used to identify fraud.
Identify the different types of risk associated with the examination of documents.
Specify the types of fraud schemes that are least likely to be noticed.
Recognize the procedures needed to deal with fraud situations.
Cite the different types of fraud investigation techniques.
Identify the steps to be followed when examining a hard drive for evidence.
Specify how the Bates numbering system is used.
Recognize the calculation for estimating the income of an employee.
Cite the characteristics of an ideal fraud interviewer, and the types of questions that this person asks.
Identify how assessment questions are used.
Recognize the different types of integrity tests.
Recognize the contents of a typical fraud report.
Cite the documentation requirements for a fraud interview.
Identify the methods available for recovering funds from a fraud.
Describe the purpose of a grand jury.