How to Detect Fraud in Accounting?

Businesses manage their financial accounts to ensure that they remain aligned with their company objectives and that their records are accurate. They often begin with the fundamentals of accounting and work their way up to financial statements and audit reports. The chance of mistakes and frauds occurring throughout this procedure is exceedingly high. Thus, Forensic Accounting & Fraud investigation enables businesses to manage financial records in light of a legal evaluation. It is critical for the investigation of frauds and the enhancement of corporate governance. Despite this, businesses keep records of their accounting systems, billing processes, and other activities. The information is then utilized to make decisions. As a result, it is critical that the data be devoid of false features or items that have been misconstrued. As a result, organizations need depend on forensic accountants to examine and eliminate erroneous data in order to maintain the highest standards of corporate governance.

Because it is unavoidable, businesses in the UAE and elsewhere should have a thorough awareness of the fundamental principle, the function of forensic accountants, and the possible consequences. Continue reading for a comprehensive overview about the Forensic Accounting & Fraud investigation.

Read also: How Forensic Accounting in Fraud Examination is Helping Corporate Governance?

What is Fraud Auditing?

According to the Association of Certified Fraud Examiners (ACFE), fraud is defined as a purposeful or intentional act committed with the objective of depriving or defrauding another entity of property or money by fraud deception, or any other unfair methods. To prevent alleged fraud, each business employs an accountant to keep records straight, but in certain cases, businesses choose not to take any chances and instead retain the services of an external auditor. This auditor use a procedure known as fraud auditing to assist in identifying any fraudulent behavior occurring inside the organization.

The fraud investigation and auditing procedure entails a thorough and exhaustive examination of all of the business’s financial records in order to uncover any fraudulent activity taking place inside the organization. The auditor will collect evidence in the form of witness statements, reports, or any other type of proof of any fraud that occurs inside the firm.

Different Types of Audit Fraud/ how to detect fraud in accounting?

There are two forms of audit fraud that may be very detrimental to a company’s bottom line:

1. Asset Misappropriation

Asset theft is one of the most frequent kinds of corporate fraud. Misappropriation is often classified into two types:

• Skimming of money 

Money theft is difficult to detect since the transaction has not yet been recorded, making this sort of fraud particularly simple to conceal. It also does not need much knowledge or expertise. Fake expenditure reimbursement, fraudulent billing schemes, check manipulation, and other forms of misappropriation are examples.

• Misappropriation of firm assets:

Another common sort of asset theft is the improper use of the company’s assets. In this case, the assets of the people or groups of persons working in the firm abuse the company’s numerous assets. This is very troublesome since it not only increases the company’s liability but also indicates unlawful use of the company’s assets.

2.Financial Statement Fraud

Financial statement fraud is less prevalent than asset theft, yet it may be just as damaging to the organization. It involves making false representations regarding profits, assets, and so forth, or hiding liabilities in order to portray greater assets to shareholders. The financial accounts will be doctored to reflect a large rise in profitability, but the reality will be otherwise.

The audit report produced by the auditor at the conclusion of the whole audit process will provide us with comprehensive and extensive information about the firm’s operations and any fraudulent behavior occurring in the organization.

Methods to detect Fraud in Auditing

Accounting and bookkeeping are merely the first lines of defense against fraud. International Financial Reporting Standards, or IFRS, mandate the use of a variety of fraud detection techniques throughout each audit, regardless of the firm or sector. These techniques include the following:

1. Brain Storming

Each fraud audit should begin with a fraud brainstorming session. The audit team evaluates the different methods in which a business might commit fraud and the preventative measures against such fraud. The first brainstorming session is also used to gather information on previous scams perpetrated by comparable firms in the same sector.

2. Testing of Journal Entry

Journal entries are the foundation of any financial statement. These journal entries will have to be modified in order to commit a fraud. This is one of the most effective and reliable techniques of detecting fraud in a business. The auditors choose entries that are very random and have no place in the journal. When the entries have been chosen, the auditors demand supporting documentation for each transaction.

3. Historical Transactions

This implies that all past transactions are reviewed, and any modifications to the accounting process are documented. Any change or adjustment in the procedure will be a significant indicator of a fraud being conducted. The auditor must request supporting documentation as to why the adjustments were necessary. This would also need the auditor investigating the company’s cash flow and working capital cycle.

4. Reviewing

The company’s management should perform frequent and unexpected assessments of the company’s operational and financial statements. Having internal control procedures and internal investigations in place will be a highly efficient way of detecting any fraudulent behavior and discouraging any future business in the organization.

If it is viable for the firm, a qualified external auditor may be appointed who will take a very deep look at your company’s workings and will assist you in forming corporate rules that would prohibit any such action in the future.

Read also: Fraud in the UAE: Forensic Accounting and Certified Fraud Examiner

How Farahat & Co. may assist you?

Certified Fraud Examiner – Farahat & Co, as one of the leading certified fraud investigators, assists in Forensic Accounting & Fraud investigation against the accounting profession. Our skilled forensic auditing team identifies fraud and acquires the tools and methods required to detect it early by giving vital information to clients for the purpose of preventing and detecting financial fraud.. Because of our team’s significant experience, we can ensure that you will get the high-quality service that you need.

Without a doubt, we are the ideal option for forensic auditing services that adhere to international standards and best practices. Our practical knowledge in Forensic Accounting & Fraud investigation can assist you in defending your firm against fraudulent conduct. Contact us immediately to protect your company against fraud and trouble!