FRAUD AND ERRORS

1.0 INTRODUCTION

The incidence of fraud and fraudulent practices in our society and business organisations, in particular, has become a source of worry. In this unit, you shall learn the concept of fraud, and distinguish between fraud and errors.
The categories of fraud, fraud detection and prevention in selected accounts will also be taught.

MUST READ: B

1. Classification of audit
2. Fraud and errors
3. Internal control and internal check
4. Introducing cooperative auditing
5. Overview of auditing
6. Procedures for auditing transactions ii – current assets (cash, debtors and stock)
7. Procedures for auditing transactions iii – liability verification

2.0 OBJECTIVES

At the end of this unit, you should be able to:

1. define fraud 
2. distinguish fraud from errors 
3. describe the categories of fraud 
4. explain fraudulent acts in selected accounts. 

3.0 MAIN CONTENT

3.1 Meaning of Fraud

The term “fraud” can be used for several sins and offences including: (a) fraud, which involves the use of deception to obtain an unjust or illegal financial advantage.

1.  intentional misstatements in, or omissions of amounts or disclosures from an entry’s accounting records or financial statements. 
2.  theft, whether or not accompanied by misstatements of accounting records or financial statements. 

Fraud can be defined as ‘misrepresentation by a person of a material fact known by that person to be untrue or made with reckless indifference as to whether the fact is true, with the intention of deceiving the other party and with the result that the other party is injured’.

3.2 Categories of Fraud

Frauds can be classified under two categories, namely:

1. management fraud 
2.  non-management fraud 

3.2.1 Management Fraud

This type of fraud occurs when the top management of an organisation deceives shareholders, creditors and external auditors for the purpose of issuing misleading financial statements. The situations which give room for management frauds to occur are as follows.

1.  Affairs of the business are dominated by one man; 
2.  Lack of sufficient competent staff to run the accounts department; 
3. Weakness in the internal control system; 
4.  Related party transactions, this is, transactions between the firm’s management and its officers; 
5. When the board of directors do not get effectively involved in the supervision of the affairs of the organisation. 

3.2.2 Non-Management Frauds

These types of fraud are rampant in the day-to-day affairs of the business, and they include the following:

(a) defalcations
(b) embezzlement
(c) erasures
(d) alterations
(e) errors

Non-management fraud may occur either in the form of misappropriation of cash or goods or manipulation of accounts without direct misappropriation. Please note the following explanations on the items identified under non-management frauds.

1.  Defalcation :This is defined as the act or instance of embezzling, and is caused by non-segregation of duties. Areas in which defalcation could occur include: (i) if the chief cashier cashes a debtor’s cheque and fails to record the receipt; (ii) assets and goods may be intercepted and may not be on record; (iii) assets may also be taken out after they have been properly recorded. These circumstances will lead to either temporary or permanent concealment. 
2. Embezzlement:This speaks of the act of appropriating money fraudulently to one’s own use. 
3.  Erasures This refers to the act of instant erasing from the books of records.
4. Alterations This means the act or process of alteration or modification to defraud the employer. 
5. Errors: Errors are defined as the act of ignorance or imprudent deviation from a code or usual practice. Errors are sub-divided into four categories as listed earlier: (i) Original errors – errors emanating from the original or source document. They are made in copying the source document into the books of original entry. (ii) Errors of omission – errors made when the whole documents or transactions are completely omitted or overlooked from the record. (iii) Errors of principle – these can occur when the recording clerk fails to abide by the rules of double entry system or where item of expense is treated as revenue or where revenue is treated as capital. (iv) Errors of commission – these occur when one fails to perform his or her duty. These errors are common in everyday activities of the business. 

SELF-ASSESSMENT EXERCISE 1

1.  Distinguish fraud from errors. 
2. Name and explain the different types of errors. 

4.0 CONCLUSION

In this unit, you have learnt that the prevalence of fraud in organisations is very disturbing. Emphasis should be placed on having strong internal control system on ground in order to quickly detect and prevent fraudulent acts. The internal auditors should be alive to their responsibilities.