Disbursement Fraud Audit Tests: Five Powerful But Simple Ideas

Here are five fraud tests you can use on your audits

You are leading the audit team discussion concerning disbursements, and a staff member asks, “Why don’t we ever perform fraud tests? It seems like we never introduce elements of unpredictability.”

You respond by saying, “Yes, I know the audit standards require unpredictable tests, but I’m not sure what else to do. Any fresh ideas?”

The staff member sheepishly responds, “I’m not sure.” 

You remember a blog post addressing how fraud can sting auditors, and you think, “What can we do?”

disbursement fraud audit tests

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Five Disbursement Fraud Tests

Here are five disbursement fraud tests that you can perform on most any audit.

1. Test for duplicate payments

Why test?

Theft may occur as the accounts payable clerk generates the same check twice, stealing and converting the second check to cash. The second check may be created in a separate check batch, a week or two later. This threat increases if (1) checks are signed electronically or (2) the check-signer commonly does not examine supporting documentation and the payee name.

How to test?

Obtain a download of the full check register in Excel. Sort by dollar amount and vendor name. Then investigate same-dollar payments with same-vendor names above a certain threshold (e.g., $25,000).

2. Review the accounts payable vendor file for similar names

Why test?

Fictitious vendor names may mimic real vendor names (e.g., ABC Company is the real vendor name while the fictitious name is ABC Co.). Additionally, the home address of the accounts payable clerk is assigned to the fake vendor (alternatively, P.O. boxes may be used).

The check-signer will not recognize the payee name as fictitious.

How to test?

Obtain a download of all vendor names in Excel. Sort by name and visually compare any vendors with similar names. Investigate any near-matches.

3. Check for fictitious vendors

Why test?

The accounts payable clerk may add a fictitious vendor (one in which no similar vendor name exists, as we saw in the preceding example).

The fictitious vendor address? You guessed it: the clerk’s home address (or P.O. Box).

Pay particular attention to new vendors that provide services (e.g., consulting) rather than physical products (e.g., inventory). Physical products leave audit trails; services, less so.

How to test?

Obtain a download in Excel of new vendors and their addresses for a period of time (e.g., month or quarter). Google the businesses to check for validity; if necessary, call the vendor. Or ask someone familiar with vendors to review the list (preferably someone without vendor set-up capabilities).

4. Compare vendor and payroll addresses

Why test?

Those with vendor-setup ability can create fictitious vendors associated with their own home address. If you compare all addresses in the vendor file with addresses in the payroll file, you may find a match. (Careful – sometimes the match is legitimate, such as travel checks being processed through accounts payable.) Investigate any suspicious matches.

How to test?

Obtain a download in Excel of (1) vendor names and addresses and (2) payroll names and addresses. Merge the two files; sort the addresses and visually inspect for matches.

5. Scan all checks for proper signatures and payees

Why test?

Fraudsters will forge signatures or complete checks with improper payees such as themselves.

How to test?

Pick a period of time (e.g., two months), obtain the related bank statements, and scan the checks for appropriate signatures and payees. Also, consider scanning endorsements (if available).

Your Ideas

Those are a few of my ideas. Please share yours.

My fraud book provides more insights into why fraud occurs, how to detect it, and–most importantly–how to prevent it. Check it out on Amazon by clicking here. The book focuses on local government fraud, but most of the information is equally applicable to small businesses.

SSARS 21 and Printing Financial Statements from Quickbooks

Is AR-C 70, Preparation of Financial Statements, triggered by printing financial statements from Quickbooks?

Many CPAs are still asking if printing financial statements from Quickbooks triggers a requirement to follow SSARS 21. Previously, if a CPA created and submitted financial statements to a client, he had to issue a compilation report. Hear the answer in this video. 

Also, we’ll take a look at whether you as a CPA can issue monthly financial statements in accordance with SSARS 21 and then perform an audit for the same client at the end of the year. 

Note: This video was created in 2015, but the information is still current. SSARS 23 does not alter the answers.

Check out my SSARS 21 book on Amazon.com by clicking here

Evernote for CPAs: Developing a Super Power

Here's how you can use Evernote to make yourself more productive

Evernote is a game-changer for CPAs.

What is Evernote?

Think of it as your personal digital library. 

Evernote is a cloud-based storage system which allows you to capture and file voice recordings, documents (including Word, Excel, PDFs), pictures, and videos. Once information is placed in Evernote, it is searchable in a Google-like fashion. Even hand-written notes are searchable.

Evernote for CPAs

Picture is from AdobeStock.com

Things CPAs Can Do with Evernote

Here are examples of what you can do with Evernote:

  • Create a personal digital library (e.g., use an Evernote digital notebook to store Journal of Accountancy articles, CPE material, and videos of class instruction)
  • Share individual files or notebooks (a compilation of files) with others (with the premium version you can collaborate with others, allowing them to change Excel or Word files)
  • Capture meeting conversations with your smartphone and save them to Evernote
  • Use your smartphone to take a picture of meeting notes on a whiteboard (remember manually written words are searchable in Evernote)
  • Encrypt selected text within an Evernote note (password protected); it can’t be viewed without the password
  • Add selected web information to Evernote using an Evernote clipper 
  • Email any document directly to your private Evernote email address (which adds the emailed information to a “to be filed” folder in Evernote)
  • Create a local Evernote notebook for sensitive information (the notebook resides on your local computer and does not synchronize to your Evernote cloud account)

The Skeletal Framework: Notes, Notebooks, and Tags 

Evernote for CPAs

1. The primary element of Evernote is a note.

Think of a note as a blank piece of paper on which you can type. You can also attach other files to the note (e.g., an Excel spreadsheet or a picture taken with your cell phone or a voice message recorded with your cell phone).

2. Notes are placed in notebooks.

Think of a notebook as a three-ring binder.

For example, if I want to create a note about comprehensive income, I can do so. Then I can attach related files (e.g., PDFs) to the note. Next, I might add a note about other comprehensive income and another about reclassifications from other comprehensive income. The separate notes can be–for example–a text file, an Excel file, and a voice message.

All three notes can be added to a notebook titled Comprehensive Income.

3. You may also tag each note.

Alternatively, I can place the comprehensive income notes in a notebook titled accounting (a more generic category) and tag each note as comprehensive income. Then I can search and find all comprehensive income notes by using the comprehensive income tag. When I type tag:”comprehensive income” in the Evernote search bar, all such notes appear.

Getting Information Into Evernote

Feed your Evernote account in multiple ways.

You can use Evernote apps or programs on your iPad, PC, and smartphone to add information to your account. 

I use this smartphone app to make and save pictures, notes, and voice messages to my Evernote account.

Evernote also provides you with a unique email address that can be used to feed information into your personal cloud. When you find something you want to store, you can email it to your Evernote account.

Also, you can use the Evernote clipper to capture information on the fly, such as when you are browsing the Internet. Just download the Clipper program from the Evernote website. 

Another neat way to get information into Evernote is with your scanner. I use a Fujitsu ScanSnap to feed scanned pages directly into Evernote.

Using Evernote on an iPhone – An Example

In this two minute video, I demonstrate the use of notebooks and notes inside of my Evernote account.

To Create Your Account

To create your account, go to the Evernote website and follow the directions. There is a free version if you desire to try it out. The premium version is $70 per year.

Recommended Books

Here are two recommended books if you desire to learn more about Evernote:

  1. Evernote Essentials 
  2. Evernote For Dummies 

CPA Firm Research: Five Tips to Make Your Life Easier

Do you ever feel like you just can't find an answer to a difficult problem?

Do you ever find it difficult to solve accounting, auditing, or tax problems? In this post, I offer five tips to aid you in your CPA firm research. These suggestions will make your professional life easier.

CPA Firm Research

Picture from AdobeStock.com

1. Firm Knowledge Base

When you perform your research for tax or accounting and auditing issues, consider archiving the research in a central location. If another person or department within your company has already spent five hours finding an answer, why not make that information available to everyone? Three ways you can store research include:

  1. One Word file
  2. Folders in a server location
  3. A database (e.g., Evernote)

Use One Word File

For sole practitioners, this can be as simple as placing all research in a single Word file on your network. Storing research in this manner makes the information electronically searchable. So when the issue comes up again, you just perform an electronic search (from the Word Home tab, click Find, type in your keyword, click Find Next).

Use a Folders in a Server Location

A second alternative is to store information in folders on a server location. Decide how to classify your archived research (e.g. auditing, tax, accounting). Then ask all firm members to save their research using the same categories and location (e.g., a particular network drive in the research folder). This can be as simple as creating a folder for each category, such as accounting, auditing, tax. Subfolders can be used as well. A better solution, however, is the use of a database.

Use a Database

Consider archiving this information in a database that is accessible to all personnel. I use Evernote as my digital library. With Evernote, you can also use notebooks and tags to store your information. Think of notebooks as folders. So if you have folders, why tags? Well, they provide another way to retrieve information, regardless of the folder. I provide an overview of notebooks and tags in Evernote for CPAs. I also encourage you to check out Michael Hyatt’s post about his Evernote file structure. 

Standardized Consultation Form

Also, consider creating a standardized consultation form. This form might include:

  1. Issue to be Resolved
  2. Persons Inquired of
  3. Professional Standard Citations
  4. Conclusion
  5. Person Performing the Research
  6. Sign-Off by Partner
  7. Concurring Partner Sign-Off (if required by your firm)

Click Consultation Form for a sample document.

Scanning System

If you want to convert your paper research files into electronic copies, here’s a post regarding the development of a scanning system. See the post regarding how you can make your paper files electronically searchable using optical character recognition. Here is an example (youtube video) in Adobe Acrobat. I recommend the Fujitsu iX500 scanner (click picture to see on Amazon).

2. AICPA Hotline

I can’t count the times I have used the AICPA Hotline, a free service (for AICPA members). Usually, I send an email with my question and receive a phone call from the AICPA representative within 24 hours. Click here for technical hotline contact information (phone number or technical inquiry form). You will also find contact information for the ethics hotline here.

I have found these experts to be extremely knowledgeable and helpful. Are there any downsides? Yes. The technical hotline will not provide you with a written response (by letter or email), but they do provide verbal answers and sources (e.g., FASB Codification section) so you can document your research.

If you desire written responses to your technical questions, consider joining the Center for Plain English Accounting (CPEA). My firm joined about two years ago, and we have found the Center to be quite helpful and worth the money.

3. Hire (or Contract With) a Technical Research Specialist

When you can, appoint a person or department to handle your internal research issues. A person who does plenty of research will naturally be more efficient and knowledgeable. In my firm, my department–Quality Control–is the designated research center. So we field questions often. 

If you can’t hire someone internally, consider establishing a relationship with an external technical person to assist you. (I do so on a fee-basis for a few firms. My email is chall@mmmcpa.com.) 

4. Firm Library

Where you can, buy quality research material. (My firm uses Thomson Reuters and AICPA resources–mainly audit guides. We also subscribe to the FASB Codification.) These publications help you sleep better at night and save you time.

Learn the most efficient ways to use your particular vendor’s electronic research tools.

Boolean operators can be helpful. I can, for example, perform a search of all of our licensed A&A publications (presently about 40) and look for every instance of interest rate swap located within ten words of the word derivative. What’s the result? A list of each publication where the condition exists. Then I can drill down within any of those publications. 

5. Disclosure Checklists – A Crystal Ball

You can electronically search a disclosure checklist to quickly find sources of related research material (e.g., FASB references). I previously blogged about using your disclosure checklist as a crystal ball to expedite your research.

What About You?

How do you perform research efficiently? Please share your tips.

 

Peer Reviews: Avoiding Independence Problems

Peer reviewers are finding plenty of issues regarding independence (and documentation)

Peer reviewers continue to hammer independence and related documentation. So it is vitally important that we not only be independent but that we also properly document its presence. My prior independence post pointed out that peer review checklists require reviewers to examine your independence documentation. This short video provides tips regarding independence and staying out of the dog house.

SSARS 23 Changes Preparation and Compilation Standards

SSARS 23 amends SSARS 21 to encompass prospective information

The Accounting and Review Services Committee (ARSC) issued SSARS 23 in October 2016. Parts of the standard (e.g., that applying to supplementary information language in compilation and review reports) were effective immediately, while other parts (mainly regarding preparation and compilation of prospective information) are required as of May 1, 2017. This post tells you how SSARS 23 affects Preparation (AR-C 70) and Compilation (AR-C 80) engagements.

SSARS 23 changes preparation and compilation standards

You’ll recall that ARSC issued SSARS 21 back in October 2014. It was effective for years ending December 31, 2015. A clarified version of the compilation and review standards is included in SSARS 21. SSARS 21 also provides new guidance for the preparation of financial statements. The Standard did not address prospective financial statements. Why? The AICPA was working on clarifying the Attestation Standards (SSAE 18), the place where compiled prospective financial statement guidance was (previously) housed. With the issuance of SSARS 23, the AICPA moved this guidance from the Attestation Standards to SSARS.

The primary impact of SSARS 23 is to provide standards for the preparation and compilation of prospective financial information.

How Preparation of Financial Statements (AR-C 70) Changed

The Preparation Standard (AR-C 70) now includes guidance regarding prospective financial information. Since significant assumptions are essential to understanding prospective information, SSARS 23 requires their inclusion. The accountant should not prepare prospective financial information without including the disclosure of the summary of significant assumptions. Also, a financial projection should not be created unless it includes:

  • an identification of the hypothetical assumptions, or 
  • a description of the limitations on the usefulness of the presentation

SSARS 23 deletes the word “accordingly” from the AR-C 70 disclaimer; the change is shown below:

How Compilation Engagements (AR-C 80) Changed

AR-C 80, Compilation Engagements, now applies to compilations of prospective financial information (new with SSARS 23), pro forma financial information (see SSARS 22), and other historical information (as provided for in SSARS 21). 

SSARS 23 also clarifies that accountants must disclose known departures from the applicable financial reporting framework in the accountant’s compilation report. Prior to SSARS 23, accountants could disclose such departures in the notes without doing so in the compilation report.

Prospective Financial Information Guidance

Both AR-C 70 and AR-C 80 were amended to clarify that the AICPA Guide Prospective Financial Information provides comprehensive guidance regarding prospective financial information, including suitable criteria for the preparation and presentation of such information.

Clarification Projects Complete

The AICPA has clarified the audit standards (AU-C), the attestation standards (AT-C), and the SSARS (AR-C).

Short SSARS 23 Video

If you desire additional information about SSARS 23, check out my video:

SSARS 21 Book

If you need SSARS 21 guidance, see my book on Amazon.

Compilations: Lacking Independence in the Current or Prior Period

CPAs must disclose independence impairments in compilation reports

Do you lack independence in a compilation engagement? If yes, then here’s how to disclose the impairment in the compilation report.

An accountant can issue a compilation report even though independence is lacking. When independence is impaired, SSARS 21 requires that the CPA modify the compilation report. The cause of the impairment (e.g., you own a portion of the business) can be disclosed in the compilation report but is not required. You can–if you prefer–simply say you are not independent; this is what most CPAs do.

Lacking Independence

Lacking Independence in Current Year

The accountant’s compilation report can disclose a lack of independence as follows:

We are not independent with respect to ABC Company.

Just add this sentence separately at the bottom of the compilation report.

Lacking Independence in the Prior Year

If you were not independent in 2016 but you are independent in 2017 (and comparative statements are presented), the accountant’s report can read:

As of and for the year ended December 31, 2016, we were not independent with respect to ABC Company.

Alternatively, the report can read:

As of and for the year ended December 31, 2016, we were not independent with respect to ABC Company. We are currently independent with respect to ABC Company.

Independence in Review Engagements and Audits

CPAs must be independent to perform review engagements or audits. There are no exceptions. See the AICPA Code of Professional Conduct for guidance on independence issues. Independence rules are found in section 1.200.

Independence in Preparation of Financial Statement Engagements

CPAs can perform a Preparation of Financial Statement engagement without being independent. No independence disclosure is required since this service is a nonattest engagement. 

My SSARS 21 Book

If you are looking for SSARS 21 guidance regarding Preparation of Financial Statements and Compilation Engagements, check out my book on Amazon.

Have you ever desired to become a fraud prevention champion? In this half-day course, we will peer into real-life governmental fraud cases and see how they occurred. You will leave the class with practical fraud prevention steps for any national, state or local government. The course location is the Capital Hilton Hotel in Washington DC.

Date:August 9, 2017
Time:8:00-11:35 a.m.
Event:Charles Hall Speaking at AICPA Governmental Accounting and Auditing Update Conference
Topic:How to Become a Super Fraud-Prevention Champion
Sponsor: AICPA
Public:Public
Registration:Click here to register.

CPA Scribo Facebook Group: Join Now

If you are interested in some dialog about accounting and auditing issues, I invite you to join my new Facebook group: CPA Scribo.

Why the group? I believe this will give you a community where you can engage with other CPAs and accountants on a one-on-one basis. The communication will be more free-flowing than my blog.

So join and share a thought, a pain, a victory, a challenge, a question. I look forward to getting to know you better.

It’s a closed group, so you will need to ask to join.

The link to join is: https://www.facebook.com/groups/1260820653952216/?ref=bookmarks

How to Create New Accounting Products and Services

Here are steps to ensure the success of your new projects

This is a guest post by Harry Hall, the Project Risk Coach. Harry is a speaker, teacher, and blogger who helps leaders and project managers get results. Harry has managed projects–mainly for insurance companies–for more than 17 years. He also teaches project management courses to CPA firms. Harry lives in Macon, Georgia with his wife Sherri. He can be found on LinkedIn.

Are you wondering how to create new accounting products and services? In this post, I’ll explain how.

how to create new accounting products and services

Imagine an accounting firm (we’ll call it Premier CPAs) that has struggled in recent years. Revenue is down, and the firm has lost several top clients. To make matters worse, the firm recently received a fail report in its peer review.

The partners recently met and were brutally honest with one another. Something has to change.

Premier CPAs has a great team of auditors. However, they are failing to understand their client’s needs, and they are not changing their business model accordingly. Over time, competing CPA firms have created superior products and services.

The partners selected a team to go offsite and develop a strategic plan. The group was challenged to perform an assessment of where the firm is and where it needs to go.

The top strategies identified were to:

  • Implement a more modern auditing software solution
  • Map and re-engineer Premier CPAs’ audit processes
  • Implement a small customer service center

How to Make Your Dreams Come True

Great ideas, but how do we make them a reality? It’s easy to talk about things, but it’s another matter to plan and execute new ideas.

Well, you could do this like many lack-luster firms. Just do the projects willy-nilly. Do it as you have time. Find a few warm bodies who are not busy to do the work. Maybe assign the activities to the IT guy.

Will you get there? Maybe, but how long will it take? How much further will you fall behind your competition?

Take a different approach. Focus on your goals and strategies. Be intentional.

How to Create New Accounting Products and Services

The following steps can put you on a fast track to greater success:

  1. Define your projects. In the initiation of your projects, define them with project charters. Spell out the problems you are attacking, your goals, what you will deliver, the assumptions of the project, the constraints of the project, key stakeholders, top risks, and who will serve on the project team.
  2. Assign project sponsors. Select partners and senior management who will define and cast the vision for the projects. These leaders should have the authority to provide resources and money to complete the projects. While the project team does most of the work, the sponsors are ultimately responsible for ensuring success (and should be held accountable).
  3. Create project teams. One of the most important things you can do for your projects is to staff the teams. Carefully select individuals who have the knowledge and skills to deliver the project in a timely manner. There will likely be some opportunity cost in this equation. You may have to assign some audit personnel to perform the project work.
  4. Kick off projects. Get your project team and key stakeholders together for the project kick-off. The sponsors should share their vision for the project. The individual leading the project (i.e., project manager) should review the project charter, ensuring that everyone understands the project and their roles.
  5. Monitor progress. The project managers should periodically meet with their team members to check the status of the project and to plan their next steps. The project managers report to the sponsors, and in some firms, the sponsors report to senior management and partners. Doing so provides transparency throughout the firm’s leadership.
  6. Celebrate success. Create a robust project culture by celebrating when teams hit milestones or complete projects on time and under budget. Thank your teams.
  7. Perform benefits realization. How do we ensure that the projects produce the desired results? Measure your results at designated times (e.g., six months and twelve months after the completion of each project).

Parting Words…This Is NOT Easy

These steps may require a significant transformation in the firm’s culture. Changing what people believe, their attitudes, and their behavior is the toughest part of creating a productive project culture.

First, leadership is required, not optional. Without a firm hand, people will fall back into old bad habits. The senior leadership team of the firm must consistently communicate their expectations and lead by example. Make sure there is a high level of accountability with appropriate rewards and recognition for high performing teams.

Second, train your teams in project management. At a minimum, identify and train individuals who will serve as project managers. You may want to get a project coach to work with your firm. Many progressive firms require their project managers to get project management certifications.

Lastly, all of these actions must be performed with an eye on your firm’s strategic goals and objectives. Make sure the changes align and support your vision, mission, and goals.

Your best days are ahead!