Page 111 - JoFA_2022

FRAUD

4. You have been hired to audit the financial a. The financial statements do not include a dis-
statements of Notreal Industries, a large, closure regarding a well-publicized, high-dollar-
multi-industry company that plans to go value employment lawsuit that is currently under
public. Which of the following observations settlement negotiations.
about Notreal’s financial statement disclosures b. The financial statements include a disclosure
might be a red flag of inappropriate regarding a material transaction with an-
financial reporting? other company that is owned by one of Not-
real’s directors.
c. The financial statements include a disclosure ex-
plaining a large variance in depreciation expense
as due to changes in the estimated lifetime of a
major asset.
d. The financial statements do not include a disclo-
sure regarding sales to a foreign government that
make up 5% of Notreal’s total revenue.
5. The fraud risk assessment should do all of the a. Analyze both internal and external fraud
following EXCEPT: risk factors.
b. Specifically consider the risk of management
override of controls.
c. Determine the personnel or departments most
likely to commit fraud.
d. Be conducted independent of organization-
al management.

ANSWERS
1. (d) Business identity theft occurs when a same building and on the same floor as the victim
fraudster hijacks a business’s identity to commit organization; then fraudulently obtain credit, loans,
financial fraud. Small businesses are especially at risk goods, and services using its name; and finally vacate
for this type of fraud because they have assets that the space once credit maximums have been reached.
fraudsters are seeking to obtain (e.g., lines of credit,
capital) but often lack the necessary resources to 2. (b) In a fraud investigation, interviews should
protect themselves. take a bull’s-eye approach, moving from the outer
One way this type of fraud can be perpetrated rings — those individuals with knowledge related
is by a fraudster’s using a business’s EIN, which is to the allegations but who are not complicit in the
generally public information, to report false income suspected scheme — inward based on how likely
and withholding on an individual tax return. The the individuals are to be involved in the offense.
fraudster then receives a tax refund, even though he In general, that typically results in the following
or she never worked for the victim organization. interview order:
Another method involves fraudulently reg- 1. Neutral third-party witnesses, or individuals who
istering an existing business in a different state might have relevant information but who are not
to conduct fraudulent activities unbeknownst to directly involved in the specific instance under
the original, authentic business. Although busi- investigation, such as Henry.
ness registrations are public information, original 2. Corroborative witnesses, or individuals who can
business owners are not automatically notified when corroborate facts related to the offense under
their business has been registered in another state. investigation, but who are not suspected to be
This allows fraudsters to easily impersonate an directly involved, such as Katrina.
authentic company and conduct fraudulent business 3. Co-conspirators, or individuals who are sus-
on its behalf. pected of playing a role in the scheme but who
Fraudsters can also commit business identity are likely not the primary suspect, such as James.
theft by closely mirroring an organization’s address 4. The primary suspect, or the individual who is
in a bid to confuse creditors and inventory suppliers. suspected of being the most complicit in the
In this scheme, fraudsters rent office space in the scheme, such as Mary-Ellen.

18 | Journal of Accountancy March 2022