Fraud is categorized in 3 types as follow:

a. Asset Misappropriation could be classified in Cash Fraud”, “Stock Fraud and Others Asset Fraud”, and “Fraudulent    Disbursement”

            b. Corruption
   Corruption in this context is according to ACFE, and not according to Indonesian Laws of Corruption (UU    Pemberantasan TPK). According to ACFE, corruption divides into Conflict of Interest, Bribery, Illegal Gratuity, and Economic Extortion.

            c. Financial Statement’s Fraud defines as fraud conducted by the management in the form of inappropriate Financial Report which could trigger financial loss for the investor and creditor or the other stakeholders. This fraud could be in a form of financial or non financial fraud.

How does the Internal Auditor detect fraud?

Most of fraud evidence has indirect nature since the indications of fraud usually came from the symptoms that shown, such as: changing of lifestyle or behavior, suspicious documentation, customer complain or colleague’s suspiciousness. At first, this fraud will reflect by the occurrence of certain characteristic whether from environment situation or someone’s behavior. The characteristic called Red Flag (Fraud indicators). The appearance of red flag does not always mean there is Fraud. However, it is common occurrence in every Fraud case. Further comprehensive understanding and analytical need to be done towards fraud is targeted to achieve early evidence in the process of detecting Fraud. According to the type of Fraud, the auditor detects fraud by:

1. Asset Misappropriation
In this category, the technique to detect Fraud is various. However, proper understanding towards internal control (especially in connection with the accounts which closely related) will be very helpful in the process of detecting fraud. There are few procedures for the auditor to be implemented:

             Analytical review
This is a review on the accounts that might show unusual or unexpected activity. For example: the comparison between goods purchased and its Nett selling could indicate a purchasing measurement.
Other analytical method is comparison of purchase of the raw material stock compare to last year’s data, which might indicate fraud in overbilling scheme or multi purchase fraud.

            Statistical sampling
 As well as the stock, basic documentation of purchasing can be tested (sample taking) to determine the  irregularities. This detection method would be effective if we have suspiciousness towards one of the attributes, such as fictive supplier. A list of PO BOX address will reveal the nature of fictive supplier.

            Complaint(s) from Vendor or outsider
Complaints, from customer, supplier or others party, are good detection device that could lead the auditor to conduct further examination.

            Site visit–observation
Site observation should reveal whether internal control is being implemented in the area. Observation on accountancy transaction should warn the auditor on the area of fraud potential.

2. Corruption
Most fraud can be detected from an honest colleague, report from colleague or unsatisfied supplier. Based on  the assumption we should conduct transaction observation. This kind of fraud could be detected by a comprehensive red flag evaluation on the receiver and the giver. People, who involved in (taker) corruption  or defalcation, usually are a big spender, gift taker, odd couple, rule breaker, complainer and genuine need characteristic. While people who do the payment generally possess sleaze factor characteristic: too successful bidder, poor quality, higher prices and the one-person operation characteristic.

3. Financial Statement Fraud.
   Financial Statement fraud generally detected by the internal auditor through financial statement analysis as follows:

 Vertical analysis is a technique used to analyze the connection between the items in the profit and   loss report, balance or cash flow report by putting it condition it in a percentage basis. For example,  there is an increase on trade payable percentage from average 28% to 52%, on the other side there is a decrease on the sales expense from 20% to 17%, this fact might become a starting point for a fraud examination.

 Horizontal analysis is a technique to analyze the percentage of items movement during a certain  financial report period. For example, there is a 80% increase in sales, while the raw material cost is  increases to 140%. With the assumption that there are no other changes in sales elements, this fact   could lead to a fictive purchasing, tampering, or other illegal transaction.

 Ratio analysis is a device to measure the connection between the values of items in a financial report.  For example, money tampering or cash robbing could cause the decrement of the current ratio.

 The steps above are a few examples of procedures that could be taken by the internal auditor to detect  fraud. There are various techniques and methodology to detect and investigate fraud that used by the  internal auditor. However, the more important thing to be paid attention to is fraud prevention and one  of the focuses of prevention is internal control. There are 3 elements in internal conrol that need close attention, as follows: Environmental Control, Accountancy System, and Control Procedure, with these following details:

When the Internal control structure already established and operates properly, the possibility for any fraud will be minimized. Internal Auditor must recognize and comprehend with each element in the internal control structure to be able to evaluate and discover its weakness.

For further information on fraud prevention and internal control, please contact our Internal Audit Services Division – PT Karmacon: +62 31 567 1713.