Question

Discuss the meaning of “red flags” of fraud. Include at least 5 “red flags” and explain what each indicates and what actions should be taken by the organization. Include a biblical application to support your recommendation(s).

Answer 1

Red flag:As per forensic accounting Red flag is nothing but indication of fraud.It indicates the activity which is unusual in nature or deviation from normal activity and its also indicates special consideration required while investigating further

These flags will be categorised as Employee and management red flags

Some of the red flags are

1.Lack of internal controls:

Company has failed to implement or oversee the internal control due to which ,there is high risk of material misstatement

Company should implement the internal controls and should be reviewed by the management at reasonable intervals to ensure that they are adequate and efficient 2)Frequent changes in external Auditors Many of the auditors used to resigning and appointing in short period of time, which may skeptic about the terms of audit engagement and leads to existence of fraud Company should follow the preconditions of audit and need to take steps to prevent resignation and appoint of auditors at frequent intervals 3)majority of transactions with related parties: if the majority of transactions are with the related parties there may be a lack of transparency or transactions may not be entered at arms length price Company should take proper approval of board and perform such transactions for arms length price 4)Missing documents:its common for missing documents but if it happens frequent ad related transaction and approval of high risk transaction then there may be a chance of fraud Company should implement a policy for maintaining backup of important mails or approval or sanction letters to avoid such 5)round off amounts Fraudsters will often create invoices with rounded amounts,there may be a more change of deviation in absence proper checking of invoice or automated billing Company should do such round off only through automated system or by taking prior approval from management