Businesses all over the world are nowadays trying to minimize any disruption that may be caused by fraud. A lot of this responsibility falls on the shoulders of internal auditors. The amazing thing about internal auditors is that they are capable of managing any uncertainty. As a matter of fact, internal audit teams are meant to uncover and mitigate risks and frauds.

Since the impact of fraud on an organization can be monumental, it can have a significant financial impact on a business. Plus, it can destroy a business depending on its severity and type. In almost all businesses whether profit or non-profit, fraud cannot be ignored. When you realize that fraud could occur in your company, your attention should shift to fraud detection.

Red Flag Warnings of Fraud

• Inventory shrinkage: While it’s common to lose a few items, excessive inventory shrinkage may be an indicator of fraud.
• Missing documents: If you experience frequent cases of missing documents it’s a sign that there may be an ongoing fraud.
• Multiple payments: There are instances where the accounting department endorses duplicate payments. Some accountants may even process payments to non-existent companies.
• Increase in invoice volumes: If you witness a high number of spikes in invoices this could be a sign that there is fraudulent behavior going on.
• Expensive purchases: If an employee makes expensive purchases it could be a moment to question their source of income.
• Staff is resistant to controls: If the staff is resisting controls it could be an indication that they are hiding something.

So what are the most common fraud audits that internal auditors should focus on?

1. Asset Misappropriation

This is perhaps the most common types of fraud that affect businesses. One of these types includes taking cash before it even goes into the company’s system. Since it requires finding evidence of something that hasn’t taken place, uncovering it can be very hard. It can take the auditors days or even weeks to uncover this.

The internal audit should, therefore, focus on accounts receivables skimming, check tampering, payroll schemes, inventor schemes, and inventory schemes. Another thing the auditor should focus on is the misuse of company assets.

2. Payroll Fraud

This type of fraud can manifest itself in a number of ways. An employee could lie about their hours of service so as to get higher pay. Some may take an advance without expecting to pay it back. According to studies, payroll fraud can significantly affect small businesses. An internal auditor should do a background check while closely monitoring timesheets.

3. Third-Party Risk

Reliance on third-party vendors for essential business is also likely to lead to fraud. According to the Ponemon Institute, up to 59% of companies have experienced data breaches. While dealing with third-party vendors many businesses don’t know who gets access to their data after sharing it with a third party.

4. Invoice Fraud Schemes

This is the type of fraud that takes place when the fraudster creates fake invoices to steal money from the company. This could mean preparing invoices for services that were never offered or products that were not delivered, creating a fake company or even awarding over-inflated contacts to personal family and friends. To avoid this, the auditor should check every good and service do a comprehensive background check to ensure there is no fraud.

5. Tax Fraud

Also known as tax evasion, tax fraud is a fraud that happens when a company’s earnings and expenses are not reported the way they should be. This is to allow them take advantage of special exemptions and lower tax brackets. The company should avoid over-reporting or under-reporting its earnings. The internal auditor should ensure that tax is filled accurately and on time.

6. Technology Audits

Even when face-to-face interaction is not possible some auditors’ projects must go on. Internal auditors should therefore use technology to conduct, meetings, and interviews. Although this process has its ups and downs, it comes with several advantages. By focusing on technology, internal auditors will be able to carry out all those audits without any issue.

7. Consumer fraud

This involves individuals targeted through bogus telemarketing, cons, ID thefts, and other schemes. Whether it’s a business tax system or an organization’s system breach, consumer fraud is now on the rise. Companies can also be victims of email phishing that involves sending targeted disguised emails.

8. Insurance and Banking Fraud

Most companies provide workers compensation and health insurance to their workers. Sadly, a number of employees are always trying to benefit from this by filling false claims thus resulting in out of pocket expenses and high premiums for small businesses. To counter this, the internal auditor should check all claims and submitted documents to ensure they are real.

9. Financial Statement Fraud

This fraud involves inflating numbers like revenues, sales, liabilities, and assets. This is normally done to dupe investors and manipulate increases in bonuses and stock. Although this kind of fraud is rare, it can significantly damage the business. The auditor should closely monitor financial statements for inaccurate information or any inconsistencies.

10. Return Fraud

Many organizations have some form of refund and return that allows customers to send back defective products that they could have bought. Some people may use this by lying about purchases, stealing receipts or even using items and returning them before the return period reaches. All receipts for returns should be checked. In case there is a refund to be given, give credit.

Final Words

Fraud can affect all businesses if they don’t know how different kinds manifest themselves. An internal auditor should know where and when the company is most vulnerable so as to take the necessary steps to protect it.

As long as the internal auditor has the resources and tools he needs, this should be an easy process. By changing their approach towards these, the internal auditor can make the businesses grow. He/she will also add a lot of value to the business in the long run.

We have help our customers to implement the tools and conducted workshops to equip them with the knowledge to uncovering fraud. If you are keen to know more, do reach out to us.