Question

Forensic Accounting and Fraud Examination - Second Edition: Chapter 8

Generally, how is the problem of management override and collusion addressed?

Answer 1

In a collusive environment as prevention (segregation of approvals, duties, and authorizations) is not possible, thus principal procedures on the internal control will be centered on detection. The detection fear can be an efficient deterrence mechanism, however would not eliminate the issue that traditionally designed systems of internal control centered on prevention would be ineffective if there is collusion or management override. The procedures in identification of the breakdowns in internal controls due to override and collusion are:

-- journal entries and other adjustments to financial information need to be reviewed for symptoms of likely misstatement due to fraud

-- significant estimation must be reviewed

-- the “one-time” transactions that seems to be unusual must be scrutinized to ensure that they have a proper business rationale