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Friday, October 07, 2005

Auditor Exposes Fraud Through Time Dimensional Analysis

The ability to spot red flags is the essence of fraud detection. Most internal auditors include in their checklists specific audit procedures to identify fraudulent behavior, such as missing or altered records, unreconciled balances, and cash or inventory shortages. In addition to these procedures, auditors have included in their repertoire audit tools that incorporate the dimensions of space or time. Because space and time analyses provide more information than other forensic tools, internal auditors can benefit from using them during fraud investigations.

Nowadays, many digital audit programs have features that enable the easy use of space or time analyses. For example, an auditor working on behalf of an insurance agency recently detected fraud by conducting a warehouse capacity analysis. According to the insurance claim, a fire destroyed a warehouse facility where 900 television sets valued at US $200,000 were stored. Because the claimant provided fictitious purchase invoices and suppressed certain inventory dispatches, a conventional audit of the inventory records did not reveal any discrepancies. To test the claim's authenticity, the auditor applied a space-dimensional test with the help of a digital audit tool, and checked the warehouse's storage capacity and the total space required to store the 900 TV sets. The result: The warehouse could hold a maximum of 700 TVs at full capacity. Similarly, auditors can use time-dimensional analyses to determine the existence of fraud or errors, as illustrated in the case study below of an actual fraud discovered in India in 2004.

posted by Brian Moran @ 10:11 AM   0 comments

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