Preventing Fraud with Surprise Audits

Alex Helfand, ENCE, Computer Forensic Specialist

Surprise audits are an important, but often overlooked fraud prevention mechanism.  Many unscrupulous employees anticipate the regular audit and cover their tracks accordingly, but a surprise audit can expose the usually hidden graft.   Additionally, the simple threat of a potential audit can deter fraudulent employee behavior.

These audits often cover the same areas as a routine audit, but in more depth.  Areas of focus in a surprise audit can include:

Accounts Payable.  A common occupational fraud scheme involves sending payments to a fictitious vendor, which are then routed to the fraudster.  Vendors should be researched to ensure that they do, in fact, exist.  Red flags for this type of fraud can include a PO Box address for a vendor, missing vendor data, and illogically formatted vendor data.

Inventory.  This is another area where fraud can commonly occur as employees may remove inventory for resale or personal use.  If you have physical inventory, conducting surprise inventory counts will help ensure the accuracy of your reported numbers.  Also be on the lookout for frequent unexpected returns and recurring damaged goods.

Payroll.  Keep ghost employees off your payroll by reviewing W-2s for any unfamiliar names to ensure that these individuals are indeed employees.  Be sure to institute a proper segregation of duties – separate individuals should be tasked with preparing and reviewing the payroll.

Internal Controls. A surprise audit can test the controls themselves to determine whether they are operating properly.  Controls may be demonstrated as working properly during the normal, expected audit, and not carried out in their stated manner at other times.  An unexpected audit can uncover these discrepancies and help identify areas in need of internal control improvements.

While surprise audits are obviously not scheduled, they should occur regularly in order to properly prevent and detect graft.  Your auditors can work with you to design an audit program that targets your company’s particular areas of vulnerability and keeps your assets safe.

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