International Journal of Economy, Management and Social Sciences, 3(2) February 2014, Pages: 174-177

TI Journals

International Journal of Economy, Management and Social Sciences

ISSN
2306-7276

www.tijournals.com

Frauds and Their Audit

Shirzad Amiri *1, Nikzad Amiri 2
1
2

Eslamabad-E-Gharb branch, Islamic Azad University, Eslamabad-E-Gharb, Iran.

Science and Research Branch, Islamic Azad University, Qom, Iran.

AR TIC LE INF O

AB STR AC T

Keywords:

Since past decades, standards of and books on audit have placed emphasis on necessity of auditors
paying attention to probability of committing fraud in financial record and reports. Over time,
especially following dissolution of large companies since 2001 on, fraud audit has been paid such
special attention to that now lessons related to fraud audit are being taught in many valid
universities around the world. It is hoped that our countrys universities will pay attention to this
issue.

Frauds audit
Auditor responsibilities
13-fold principles
Electronic frauds
Types of fraud

2014 Int. j. econ. manag. soc. sci. All rights reserved for TI Journals.

Introduction
Since the advent of audit up to now, auditors responsibilities for fraud have changed significantly. What we already witness is an increase
in auditors responsibilities for fraud, which stemmed from increasingly growing and expanding frauds and suits against auditors.
In fact, with this practice and performance, auditors are trying to maintain their trust in the society.
One of the most important transformations in this field is of the advent of a type of audit called fraud audit.
In present paper, we examine the process of fraud audit: next, we state unique principles and characteristics of fraud audit.

Fraud audit
Fraud audit differs from financial statement audit.
Financial audit is not searching for and detecting frauds mainly, but rather it testifies whether financial statements have been prepared and
provided fairly or not. But fraud audit is a specific one designed to detect financial statement frauds. Followings are underlying and basic
assumptions of fraud audit: It is possible for frauds to occur even in accounting systems with exact and strict internal controls. Appearance
of fraud in a transaction may show a trivial sum, but it may hide a huge important one. Clues of fraud can be recognized if auditors search
for it sufficiently lengthily and deeply.
Frauds may relate to any levels of society including employees, general public, and/ or managers.
Fraud auditors need to have special skills to defraud in addition to skills required by financial audit. Among such skills, followings can be
mentioned: to gain understanding of proper methods of gathering and documenting evidence of losses caused by frauds, to have skill of
cross-examining third parties, to have skill of giving testimony, to know fraud nature in law legal and audit views, to have sufficient
competency and experience with recognition of frauds relating different professions such as bank frauds, insurance frauds, different
manufacturing industries frauds, and retail frauds.
It should be noted that there is another type of audit called auditing for courts or legal audit which is different from fraud audit. In temporal
terms, the former is performed shortly after the latter. In this type of audit, complex financial transactions and numerical data need to be
translated in a language which can be understood even by ordinary individuals. In addition to specialized accounting and audit skills, court
auditors need to have such skills as criminal investigation, report writing, giving expert testimony, ability to make the matter
comprehensible, professional behavior, etc.

Thirteen fold principles of fraud and its audit

For fraud audit, 13 principles are important which somehow reveal its differences from financial audit.
They include:
1) Main difference between fraud audit and financial statements audit is more related to thinking way and view than to procedures.
2) The job of fraud auditors focuses on exceptions, unusual cases, accounting violations, and behavioral models rather than on paying
attention to mistakes and omissions.
3) Experience is the basic basis of education on fraud detection audit, not accounting textbooks and texts. In this field, education is
such that the auditor thinks, like an offender, that what the weakest link of clients internal control system is.
* Corresponding author.
Email address: shirzadamiri@gmail.com

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4)

From the view point of financial statements audit, fraud of intentional misrepresentation of financial events is of importance. But
in view point of fraud audit, fraud of intentional misrepresentation of all financial events is even unimportant.
5) Frauds are stimulated by economic, self-righteous, and subjective psychological belief (ideological) in ideas motives.
6) Structured fraud theories involve motivation, opportunities, and interests.
7) Within computer accounting environments, frauds can take place at any levels of input, middle-put, processing, and output stages.
8) The most common area of fraud among low-level employees relates to payment (debts, salary, claims in relation to costs and
benefits) cases.
9) The most common area of fraud among high-level managers relates to respective benefits flattening.
10) Accounting frauds originate from the absence of internal controls.
11) Losses caused by frauds move faster than the rate of growing number of frauds.
12) Accidental detection of frauds is more frequent than the through audit techniques.
13) In order to prevent frauds, appropriate internal controls are as much needed as a workplace where employees honesty and mutual
trust are valued.
Is fraud detection accidental or based on scientific principles?
There exists a common concept in accounting profession based on which most frauds are detected accidentally, not by auditing and
designing accounting systems.
If this concept holds perfectly, it means fraud audit has no scientific basis and most frauds are detected accidentally. In this case, how
standards, practices and scientific bases of fraud audit are valued. The fact is that, in some cases, auditors succeed in detection of frauds
accidentally, but in others, it takes place based on a regime while using specialized methods and techniques of fraud audit. But it is better to
note that a comprehensive methodology for fraud detection has not been developed yet which is generally accepted like financial audit
standards. Perhaps this is due to diversity and extensity of frauds within various professions. What already exists from fraud audit is a set of
tricks which may be useful only in some cases and cant be generalized to others.
As stated previously, for fraud audit, there exists no generally accepted methodology, that is, subjective tendency exists in the field of fraud
audit instead of structured techniques. In this regard, some points strike the mind:
Point 1: Fraud can be both found and detected accidentally.
Point 2: Methods and techniques of financial audit, idiomatically, come and go while none of them has been formulated specifically to
detect frauds.
Point 3: To find out frauds is an art rather than a science, which needs both innovative, creative thinking and scientific integrity and rigour.
Point 4: For frauds audit, insistence, pursuit and self-confidence are more important than knowledge of audit principles and standards
solely.

Theory of electronic frauds audit

Since 1950, usage of computers for business applications has prevailed in the U.S., but no serious work on electronic crimes was dont until
1958 when international Stanford research institute formally began to compile electronic fraudulent applications occurring on financial
statements of large stock companies.
Given electronic frauds, there exists a combination of 3 concepts of motivations, opportunities, and means and methods (MOMMS), as
briefly pointed to below:
Motivation: for a person to commit electronic crimes, including:
Material motivations: main intent of the person determined to defraud, who is willing to gain monetary profit.
Self-righteous motivations: stimulate sense of need to show ones smartness and cleverness to others.
Visional motivations: defrauder acts to take revenge on somebody or something he considers as the cause of his being oppressed.
Psychotic motivations: due to misunderstanding of reality and/ or to being fearful or anxious about illusory factors. A few frauds
taken place were attributed to this type of motivation.
Opportunities: are of 2 intra organizational and extra organizational types.
Intra organizational opportunities: encourage people to defraud electronically and include such cases as workplace,
punishment/reward system, degree of mutual trust among employees, degree of validity of ethical standards, level of power
exercise for functions, internal control quality, etc.
Extra organizational opportunities: including such cases as ethical practices and values, industry competition conditions, and
international and national economic conditions.
Methods: by which a person may defraud electronically include:
Input manipulation: that is, misinterpreted, false, and forged data being more or less than reality are entered into systems.
Processing manipulation: requires knowledge of programming. Software like Trojan horse, Trap door, and time bomb are of this
type.
Output manipulation: includes information theft, making some changes in information, and reloading it on the systems.
Characteristics: of electronic environment indicate features making particular frauds possible in such environment like:
Data centralization:

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Computer systems usually insert data collected from all departments of an organization into one center. Thus, an offender needs
nothing but a password in order to have access to all organizational information.
Possibility of instant manipulation
After an offenders instant and unauthorized entry to the network, systems are not able to distinguish an authorized person from
unauthorized one. Computers run commands immediately upon receiving them. And computer speed reduces the likelihood of
offenders being disclosed sharply.
Failure of electronic internal controls
Many computer programmers and analysts have no precise information on accounting internal controls. This causes some of
accounting systems to be designed with no sufficient controls. Also, it is possible that such systems undergo structural changes in
the future while the need for proper and commensurate changes in internal controls is ignored.
Uniqueness of fraud audit
Any Kind of fraud has its own complexity. All organizations do not think in the same manner. They are opportunistic. Wherever a
desirable situation exists to steal, they choose the best way to do that. In real world, defrauders leave some traces behind them so
auditors must learn how to discover these signs. The point is that predetermined orders and prescriptions of financial audit are not
effective here. Of course, like financial audit, fraud audit is planned, but making use of structured checklists, questionnaires,
interviews, and questionings as well as predetermined and premature plans of audit may result in adverse outcomes in some cases.
A trained person determined to defraud is like a thief entering with a light, that is, he tries not to be trapped in auditors nets by
studying and becoming familiar with their checklists and other predetermined programmers.

Thus, a fraud auditors mind must be accustomed to wandering purposelessly and restlessly initially.
Its curiosity must be stimulated by everything. He needs to understand that any task of fraud audit is a new environment with new people
and new systems. This assumption that past experience is sufficient to solve problems is a misleading reasoning. Frauds are similar to
snowflakes which assume different sizes, shapes, and compressions and weight and size of one of them cant be obtained by observing
another one. In fact, present problem must be paid attention to perfectly. To make reference to the past and predetermined experience may
deviate from fraud detection.

Diagram of electronic fraud audit

Conclusions
Sociologists argue that criminal act is an acquired behavior that offenders learn it from other people, but fraud audit is learned more by
oneself than by others, that is, fraud audit can be taught with a lot difficulty. An auditor must learn how to audit frauds on his own. Fraud
audit is not an easy job, but a hard one mixed with failures. Fraud auditors find themselves immersed under plenty of information in which
they often do not know what they should look for and even why they should look for something.

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They only know that something is suspicious. Lack of a generally accepted comprehensive methodology makes this task more difficult. In
any case, with respect to fraud and its audit, detection, and reporting, we have a long way to go. And a broad response to the issue of fraud
requires an extensive investigation on any kinds of fraud occurring in different organizations and firms, which can be studied by future
research.

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