Quiz 1: The Nature of Fraud

Business

Fraud loss: A loss caused as a result of wrongful or deceiving act by any person intended to do such an act. With respect to types of frauds they include frauds committed against the organization or the frauds committed on behalf of the organization. A fraud committed by any employee of the organization resulting in a financial loss to the employer organization is a fraud against the organization and a fraud committed by the management on behalf of the organization include the reporting false financial statements to look better than they actually are. 1. Calculate the additional revenue each company must generate to recover the losses from fraud: Calculate the additional revenue that must be generated by C Inc. as shown below Step: 1 First calculate the percentage of net income over sales or say net income ratio Net income ratio is calculated by dividing net income by the sales revenue. img Therefore, the net income ratio is img . Step: 2 Now calculate the additional revenue that must be generated to recover the losses from fraud The additional revenue that must be generated to recover the loss is calculated by dividing the fraud loss by the net income ratio img Therefore, the additional revenue that must be generated by C Inc. to cover the fraud loss is img . Calculate the additional revenue that must be generated by A Inc. as shown below Step: 1 First calculate the percentage of net income over sales or say net income ratio Net income ratio is calculated by dividing net income by the sales revenue. img Therefore, the net income ratio is img . Step: 2 Now calculate the additional revenue that must be generated to recover the losses from fraud The additional revenue that must be generated to recover the loss is calculated by dividing the fraud loss by the net income ratio img Therefore, the additional revenue that must be generated by A Inc. to cover the fraud loss is img . 2. The amount of revenue to recover the loss from fraud is different for both the companies because of the difference in the net income ratio. The higher the net income ratio the lower is the revenue required to cover the loss as the ratio of net income to sales is high resulting in higher net income on sales. As the net income ratio of A Inc. which is 25% is higher than the net income ratio of C Inc. which is 10%, the revenue required by A Inc. is less when compared to the revenue required by the C Inc. 3. The company A Inc. will probably have to generate less revenue to recover the loss because the net income ratio is high.

Fraud: Fraud is defined as a misrepresentation of fact done knowingly, with of intent of making someone to believe and act upon it and thus creating a loss of damage to the company such as lie, cheat, steal. 1. There are several clues that caused J to suspect that fraud was involved are mentioned as follows: • There were few Accounts Payable checks which lacked complete endorsements by payees. • The Handwriting on five checks over which the endorsements were made the handwriting was nearly the same even though names are different. Checks were pushed through as rush payments. • All the five checks have been cashed at the same convenience store which was less than five miles from the home office. • No supporting documents were found for the payments. Other payments made to the same payees were identified and retrieved the paid, but the endorsement did not look like endorsement on the suspicious checks. 2. It is important for fraud examiners to follow up on even the small inconsistencies because if G did not look at the written comment provided by J, H could be still cashing checks which doesn't belong to him. If 90 checks cashed has not been identified at the convenience store, he would have continued and had done more times creating damage to the company. To know the areas/ department where the fraud had occurred and besides that to understand what all instruments have been used to do the fraud so that the people behind the fraud can be identified and method adopted by them can be traced. 3. Since, there was some endorsements made, so the auditors would had been trying to know that which all employees are involved in the fraud and how much personal gain the employee might have made from the fraud. The purpose of researching the personal files of every employees is to identify financial issues, demographics, criminal record, vacations availed by employees, and signature of payees to match up with signatures on checks.

Out of many definition of fraud, the mostly common is the following: Fraud is a generic term , and embraces all the multifarious means which human ingenuity can devise, which are resorted to by one individual, to get an advantage over another by false representations. No definite and invariable rule can be laid down as a general proposition in defining fraud, as it includes surprise, trickery, cunning and unfair ways by which another is cheated. The only boundaries defining it are those which limit human knavery. Fraud is a deception which is intentionally made by one or a group for personal gain or to cheat another individual.