INTERNAL AUDITS ROLE IN PREVENTING FRAUD Essay

Recent alterations in legislative and regulative demands along with the lifting cost of fraud have led to an increased concern over fraud direction patterns.

While many Internal Audit maps seek to implement effectual antifraud steps, they face an array of fraud direction methods offering varying grades

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of success. Therefore, it is critical that Internal Audit maps seek to implement the enterprises that have greatest ability to impact the organisation at a

sensible cost.

Constrained resources ( including forces, clip, or budgetary restraints ) , drive Internal Audit to carefully choose on the most cost-efficient methods. This

study provides readers with a snapshot into insider tendencies in detection, preventing, and look intoing fraud.

KEY IDEAS

Sarbanes-Oxley May Not be Adequate: Respondents remain concerned over the hazard of fiscal statement fraud proposing that recent statute law enacted to

minimise happenings of such fraud may non be equal.

IT Fraud Poses an Emerging Menace: The increased usage of engineering is doing companies to go more susceptible to fraud as demonstrated by the

fact that study respondents ranked computing machine offense 2nd highest as the type of fraud that concerns them most. The job is exacerbated by the fact that

many internal audit sections do non possess the necessary IT audit accomplishments to assist protect the company against this important menace.

The Fraud Risk Assessment Imperative: The figure one fraud challenge for study participants was supplying the Audit Committee and External Auditor

with confidence that fraud is good managed across the organisation. Implementing a comprehensive fraud hazard appraisal is the most effectual manner to

demonstrate to identify components that fraud exposures have been identified and are good managed. Not surprisingly, implementing fraud hazard appraisals

was the figure two challenge with set uping a fraud plan for study participants.

Making a Culture of Fraud Awareness: Respondents reported that another important fraud-related challenge is pass oning fraud consciousness across

the organisation. Promoting consciousness of fraud strategies and indexs provides direction with the tools to turn to and place fraud early resulting in improved controls and efficiency additions.

Traveling Beyond a Conformity Focus: Survey participants responded that many of the needed steps that companies are implementing to assist forestall

fraud are non needfully the most utile 1s uncovering a spread between current recommendations and end-state ideals. Companies need to travel beyond

simply a conformity focal point and implement steps that will ensue in true and effectual fraud bar and sensing.

Audit Director Roundtable Survey Results Audit Director Roundtable Survey Results

Internal Audit ‘s Role in Detecting, Preventing, and Investigating Fraud Page 2

OVERVIEW OF PARTICIPATING Members

Responses to the Roundtable study were collected from 44 establishments across the rank, stand foring 15 industries from assorted gross sets. As

respondents are self-selected, this informations can non be considered the consequence of a scientific canvass ; however, they serve as a utile benchmarking usher for Roundtable

members. An overview of the study participants are provided below:

Survey Participants by Gross

Survey Participants by Industry

( $ in Billions )

Insurance

19 %

Banking

2 %

Between 3 and 10

28 % Between 1 and 3

28 %

Less than 1

7 %

M ore than 25

7 %

Between 10 and 25

30 %

Business Servicess

2 %

Chemicals

5 %

Computer Software

2 %

Electronicss

2 %

Energy & A ; Utilities

9 %

Utilities

7 %

Consumer Merchandises

Financial Services

16 %

Health Care

2 %

Food

5 %

Telecommunication

9 %

Construction

2 %

Transportation system

14 %

Unknown

2 %

2 %

Top OF INTERNAL AUDIT ‘S FRAUD CONCERNS

Participants were asked to rank the undermentioned five types of fraud on a graduated table of 1 to 5, where 1 = non worried at all, and 5 = worried a batch. Interestingly,

respondents significantly more concerned about plus embezzlement than fiscal statement fraud despite the fact that plus embezzlement strategies have a

far smaller average loss ( $ 93,000 ) than deceitful statement strategies ( $ 1,000,000 ) 1. Respondents are likely most concerned about plus embezzlement because

these types of strategies occur most frequently in concern. However, the fact that fiscal statement fraud still ranked so extremely as a concern suggests that there is still

work to be done beyond the recommendations of Sarbanes-Oxley to pull off this menace.

Survey consequences indicate that computing machine offense remains a important concern. This concern implies that technological progresss are increasing the hazard and gap

doors to more signifiers of fraud or easing the ability of culprits to perpetrate deceitful Acts of the Apostless.

Corruptness and graft was marked highest by respondents in the fiscal services, transit, telecommunications, and energy and public-service corporations industries.

Organized offense was besides ranked highest by members in the fiscal services, telecommunications and transit industries as these industries may be more

prone to such activity.

Rank THE AMOUNT OF CONCERN ASSOCIATED BY TYPE OF FRAUD

Embezzlement of Assetss

Computer Crime

Fiscal Statement Fraud

Corruption/Bribery

Organized Crime

3.3

3.2

2.6

1.8

3.5

Internal Audit concerns

markedly more about the

misappropriating of assets,

computing machine offense, and fiscal

statement fraud than

corruptness or organized offense

n = 44 Beginning: Audit Director Roundtable Research

MOST Ambitious Elements OF FRAUD

Members indicated that the most ambitious component of set uping a fraud plan is supplying confidence to the external hearer and the Audit Committee that

fraud is being efficaciously managed. It follows that members are besides fighting with implementing a fraud hazard appraisal as this tool may be an effectual manner to

demonstrate to the Audit Committee or the External Auditor that the company has identified and implemented a conjunct attempt to pull off fraud across the

organisation.

Respondents besides reported challenges with continuously proctor fraud in a cost effectual mode. They are besides fighting with pass oning fraud consciousness

across the company as more frequently than non, concern unit direction is non cognizant of the magnitude or impact of fraud and is non well-versed in fraud strategies,

scenarios, ruddy flags or extenuating controls. In follow-up interviews, respondents indicated that supplying line direction with the tools and cognition to better

manage fraud on the forepart lines will travel a long manner to cut downing the menace of fraud and dollar loss associated with it.

Trouble IN ESTABLISHING A FRAUD PROGRAM

Understanding what fraud attempts are adequate to supply AC and EA with

confidence that fraud is efficaciously managed

Understanding how to implement fraud hazard appraisal

Understanding how to continuously supervise fraud

Understanding how to pass on fraud consciousness companywide

Understanding how fraud hazard appraisal and extenuation most expeditiously fit into

current audit activities

Understanding how to develop audit staff to better detect fraud

Understanding how IA may be more proactive in fraud extenuation

Understanding how IA may cut down the hazard of fiscal coverage

Understanding IA ‘s function in developing a fraud plan

n = 44

7 %

20 %

25 %

28 %

32 %

35 %

39 %

48 %

61 %

70 %

68 %

66 %

65 %

64 %

56 %

61 %

48 %

34 %

23 %

11 %

9 %

7 %

9 %

5 %

5 %

5 %

0 % 10 % 20 % 30 % 40 % 50 % 60 % 70 % 80 % 90 % 100 %

Most Ambitious Somew hat Challenging Not Challenging

Beginning: Audit Director Roundtable Research

. 2004 Corporate Executive Board

Audit Director Roundtable Survey Results Audit Director Roundtable Survey Results

Internal Audit ‘s Role in Detecting, Preventing, and Investigating Fraud Page 5

ROLE OF INTERNAL AUDIT AND MANAGEMENT IN FRAUD

Survey respondents were asked to rate ( on a graduated table of 1 to 5 ) their perceptual experience of Internal Audit ‘s and direction ‘s engagement and expertness in fraud bar,

sensing, probe, coverage and preparation. Harmonizing to our respondents, Internal Audit and direction vary in the degree of engagement and expertness in

fraud related activities. Surprisingly, internal audit sees themselves more involved in all facets of fraud except bar and consciousness.

Expertness IN FRAUD ACTIVITIES

2.6 2.9

Prevention

2.3 3.0

Detection

2.1 3.0

Probe

2.5 3.1

Reporting

2.2 2.6

Awareness/Training

Audit Director Roundtable Survey Results Audit Director Roundtable Survey Results

Internal Audit ‘s Role in Detecting, Preventing, and Investigating Fraud Page 6

ANTIFRAUD METHODS USED TO PREVENT/DETECT

Survey participants were asked to rate the grade of use and utility of assorted antifraud steps. Unsurprisingly, codification of moralss, whistle blower

hotlines and internal controls ranked to the top in footings of use due to the fact that they are mandated by jurisprudence. Of note, choice steps that did non acquire high

Markss in footings of use ( fraud consciousness preparation, fraud hazard appraisals, fraud scrutinizing ) , did receive high Markss for usefulnessgiving weight to the fact

that companies should encompass the spirit of the jurisprudence instead than the missive of the jurisprudence when it comes to taking where to apportion antifraud resources.

ANTI-FRAUD METHODS

Use OF METHODS

86 %

75

91 %

%

68 %

64 %

50 %

49 %

48 %

47 %

44 %

43 %

41 %

40 %

30 %

Code of Ethical motives

95 %

100 %

Whistleblower Hotline

93 %

Internal Control Review

Periodic Compliance Audits

Conducting Background Checks for Hires

with Budget Responsibility

Fraud Coverage Policy

Ethical motives Training

Appointing Compliance Personnel

External Audit Detection of Fraud

Fraud Prevention/Detection Training

Conducting a Fraud Risk Assessment

Continuous Monitoring of Key Fraud Risks

Fraud Auditing

Anonymously pass oning out existent

Cases of Fraud to the Organization

Staff Rotation

Employee Contracts

Forensic Accounting

100 %

0 %

USEFULNESS OF METHODS

9 % 20 %

3 % 28 %

12 % 30 %

18 % 30 %

18 % 32 %

24 % 30 %

18 % 22 %

6 % 38 %

3 % 30 %

27 % 28 %

27 % 40 %

24 % 44 %

30 % 50 %

24 % 58 %

18 % 68 %

48 % 50 %

39 % 58 %

0 % 20 % 40 % 60 % 80 % 100 %

Very effectual

Slightly effectual

Not effectual at all

1 %

6 %

2 %

2 %

1 %

1 %

11 %

6 %

2 %

5 %

2 %

2 %

1 %

1 %

1 %

While external audit sensing of fraud was used by half of the study

participants, it scored the smallest in footings of really effectual ( 7 % ) and largest in

footings of non effectual at all ( 25 % ) .

Beginning: Audit Director Roundtable Research

n = 44

. 2004 Corporate Executive Board

PROFESSIONAL SERVICES NOTE

The Audit Director Roundtable has worked to guarantee the truth of the information it provides to its members. This

undertaking relies upon informations obtained from many beginnings, nevertheless, and the Audit Director Roundtable can non vouch the

truth of the information or its analysis in all instances. Further, the Audit Director Roundtable is non engaged in rendering

legal, accounting or other professional services. Its undertakings should non be construed as professional advice on any peculiar

set of facts or fortunes. Members necessitating such services are advised to confer with an appropriate professional. Neither

Corporate Executive Board nor its plans is responsible for any claims or losingss that may originate from any mistakes or

skips in their studies, whether caused by Corporate Executive Board or its beginnings.

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