Mastering Internal Controls and Fraud Prevention

MASTERING INTERNAL CONTROLS AND FRAUD PREVENTION INSTRUCTOR’S LECTURE OUTLINE

This lecture outline follows the 5 sections of the Workbook, Mastering Internal Control and Fraud Prevention.

Section 1: How dishonest employees steal inventory

Section 2: How to prevent—or spot—employee theft

Section 3: Check fraud

Section 4: Credit card fraud

Section 5: How vendors cheat you

Lecture notes format The lecture notes for each section of the Workbook are divided into four to five parts:

 Workbook section covered. The section number and title of the workbook covered.

 PowerPoint slides. The numbers of the slides used to cover this section of the workbook. Note: Because the PowerPoint presentation includes animation to enhance learning, it is designed to be shown in “Slide Presentation” mode. When the slides are shown in Slide Presentation, the numbers on the sides will not appear.

 Topics covered. An outline of the topics covered in the PowerPoint slide presentation. These can also be used if you choose to print handouts using PowerPoint’s Handout Master. Where appropriate, slide numbers are given for specific topics.

 Key teaching points. These appear only in those sections where in-class experience has shown the need to emphasize some point.

 Optional points of emphasis. Topics that generally should be stressed, depending on the makeup of your class.

 In-class activities. Suggested selections from the Homework Exercises portion of the teaching guide to work through in class. There are enough Homework Exercises for both in-class activities and homework assignments.

Instructor’s Lecture Outline 1 Mastering Internal Controls and Fraud Prevention

Section 1HOW DISHONEST EMPLOYEES STEAL INVENTORY (Slides 2–20) Topics covered  Definitions of terms used in the workbook but not defined in the workbook (Slides 2–5)  Four common types of noncash theft, emphasizing that the most common one: unconcealed larceny (Slide 6)  (Slides 7–10) Details on each type:  why unconcealed larceny goes unreported  how thieves use shipping and receiving document  how fraudulent write-offs operates  Teaching tip: For employee theft, two statistics may be useful. 1. Although the Association of Certified Fraud Examiners (ACFE) estimates that a typical business loses an average of 6% of revenues from employee theft, small businesses may lose more because they have limited resources for detecting fraud 2. One-third of business bankruptcies are caused by employee theft, according to a U.S. Chamber of Commerce survey. Mention how an anonymous tip-line might help in this regard.

 The importance of a centralized receiving and shipping department (Slide 11).  Red flags of employee theft from the list on workbook pages 3 and 4 (Slide 12)  Internal controls that help prevent or limit employee theft (Slides 13–18) Teaching tip: Connect how a particular control makes a particular kind of theft more difficult—and have an open discussion of preventive and detective controls.  Proper documentation as a control (Slide 13).  How to make storing and counting inventory a control (Slide 14)  Segregation of duties as a control (Slides 15–16).  Physical safeguards (Slide 17)  Analytical reviews (Slide 18)  Which employees are most likely to commit theft (Slides 19–20). Teaching tip: The triangle on Slide 20 is well recognized in the fraud prevention field. In-class activities From Homework Exercises for Section 1:  Four types of noncash theft, Problem 1  Describing each internal control, Problem 2  Matching red flags to type of theft, Problem 5 From the workbook:  Red flags of employee theft, Quiz I, Problem 1 (page 8), Quiz II, Problem 1 (page 11)

Section 2HOW TO PREVENT—OR SPOT—EMPLOYEE THEFT (Slides 21–27)

Topics covered  How to hire the right employees (Slides 21–22)  Fraud audits (Slide 23)  Bonding employees (Slides 24–25)  Four signs of employee theft from the extensive list on workbook page 18 (Slide 26)  Fraud control in very small companies—one or two employees (Slide 27)

In-class activities From Homework Exercises for Section 2:  Background checks before hiring, Problem 1.  Fraud audits, Problem 2.  Fidelity bonds, Problem 3.  Linking the type of theft to its description, Problem 4.  Benefits and risks of involving the owner’s spouse in internal controls, Problem 5.

Section 3CHECK FRAUD (Slides 28–390

Topics covered  Five types of check fraud listed from the workbook, identifying NSF checks and checks written on closed accounts as the most common check frauds (Slide 28).  Check theft schemes (Slide 29)  Other check fraud schemes, such as kiting (Slide 30)  How to identify counterfeit checks (Slide 31)  New technologies in check printing (Slides 32–33)  Spotting fraud by reviewing cancelled checks (Slide 34)  Employee check fraud (Slide 35)  How to prevent/limit check fraud by customers (Slides 36–38)  Check acceptance policies and systems Key teaching point: Each check acceptance policy must be reviewed by management to weigh its impact on sales (Slide 39)

In-class activities From Homework Exercises for Section 3:  Five types of check fraud, Problem 1  Policies that limit check fraud, Problem 3  Which controls should be used for a big v. small company, Problem 4

Section 4CREDIT CARD FRAUD (Slides 40–52)

Topics covered  Preventing credit card fraud. (Slide 40)  Schemes that exploit lost or stolen credit cards (Slides 41–44)  How to spot credit card scams (Slide 45) Teaching tip: If you have computer video, try the entertaining video of a sophisticated credit card counterfeiting operation found at www.wired.com/threatlevel/2009/01/video-inside-a/  Features that indicate a valid VISA card (Slide 46)  Features that indicate a valid MasterCard(Slides 47–48)  Features that indicate a valid American Express card (Slides 49–50 )  Employee use of company credit cards (Slide 51)

In-class activities From Homework Exercises for Section 4:  Protecting against credit card scams (Problem 1)  Match the kind of scam to its description (Problem 2)  How to know a valid AMEX v. Visa v. MasterCard (Problems 3 and 4)  Various types of credit card frauds (Problem 5).

Section 5HOW VENDORS CHEAT YOU (Slides 52–58)

Topics covered  Vendors cheat you in many ways:  Bribery (Slide 53)  Telemarketing scams (Slides 52–56)  Paper and toner scams  Loan scams  Buyers club scams (Slides 54)  Telemarketing laws and their enforcement (Slide 57)  Resources that help prevent vendor fraud (Slide 58) In-class activities From Homework Exercises for Section 5:  Bribery, Problem 1  Policies that prevent vendor fraud, Problems 2 and 3  Resources that help prevent vendor fraud, Problem 4

Instructor’s Lecture Outline 4