The course project flows fromWeek 1throughWeek 5. The course project assignments are based on the development of a policies and procedures manual for a hypothetical or actual organization.
Use the same organization as in previous weeks.
Tasks:
As a course project task for this week, provide the purpose, scope, responsibilities, definitions, activities and processes, references, and forms for policies regarding the following:
- Summarize financial statement fraud.
- Analyze fraud from earnings manipulations and earnings management.
- Analyze employee fraud and how it can be prevented, identified, and corrected.
- Describe vendor fraud and how it can be prevented, identified, and corrected.
Submission Details:
- Present your manual in a 3- to 5-page Microsoft Word document using APA style.
Examination of Information Security Systems, Financial Statement Fraud Risks, and External Audit Procedures Tieshia Garner 8th Aug 2023 Introduction Maintaining integrity and trust in financial reporting is crucial for properly functioning capital markets. However, organizations sometimes engage in intentional financial statement fraud to mislead investors about their performance and profitability. Auditors play a vital role in detecting material misstatements resulting from fraud or error through certain required procedures. At the same time, implementing a robust information security management system helps safeguard sensitive data through technologies, policies and training. This report will elaborate on distinguishing information security systems from general IT systems, signs of potential accounting fraud, and audit techniques to assess fraud risks. Information security deliverables & Information security management systems: It is helpful to make a distinction between general information system deliverables and specific information security deliverables. An accounts payable system focuses broadly on processing invoices and payments, while an accounts payable security system focuses specifically on protecting the confidentiality, integrity and availability of that financial data. Though security controls may be embedded within a larger information system, it is useful to delineate information security management systems (ISMS) as their own structured framework. An ISMS provides a comprehensive, organization-wide approach to managing security risks through policies, training, technologies and other controls. A robust ISMS goes beyond just implementing security controls or standards. It provides a risk-based approach to balance the costs and benefits of security investments tailored to the organization's unique risk appetite and industry regulations. The key elements of an ISMS framework include: · Hardware and systems that use, store and transmit sensitive information. · Policies and procedures to govern security practices. · Security awareness training and education for staff. · Data protection technologies like encryption, access controls and malware prevention. · Incident response and business continuity protocols. · Third-party risk management procedures. · Ongoing security assessments, audits and improvements. At its core, information security aims to safeguard the confidentiality, integrity and availability of data through managing its storage, transmission and usage. Information security systems refer to the technologies, policies and procedures in place to prevent unauthorized access, disclosure, destruction or disruption of data. Robust information security systems start with a comprehensive ISMS strategy aligned to organizational goals and risk tolerance. Key activities of an ISMS include classifying data by sensitivity, conducting risk assessments, implementing layered security controls, training staff on policies, detecting and responding to incidents, and continuous monitoring and upgrades to meet evolving threats. Working cross-functionally, information security professionals use frameworks like ISO 27001 or NIST to methodically address risks to data based on impact and likelihood. Though technical controls like encryption and firewalls are crucial, an effective ISMS requires participation across departments to uphold security practices in daily operations. Regular audits by internal and third-party assessors evaluate the strength of the ISMS program. Information security delivers measurable business value by allowing organizations to leverage data analytics and other technologies that require trustworthy data. A mature ISMS provides the foundation to securely capitalize on information, manage risks and maintain resilience. Potential need & process for examining fraud symptoms: Financial statement fraud occurs when companies intentionally misstate or omit financial information to mislead investors about their performance and profitability. Several warning signs may indicate potential accounting fraud. A key red flag is revenue growth without a corresponding increase in cash flow. Companies may prematurely record expected future sales before cash is received to inflate revenue. This divergence between revenues and cash flow is a distortion. Consistently strong sales growth when competitors struggle can also be dubious. This performance gap versus industry peers should be scrutinized, as it may indicate overstated revenues or earnings. A suspicious spike in performance at the end of a reporting period is another concern. Managers may artificially boost income through unusual transactions or accounting adjustments solely to meet quarterly or annual targets. Financial statement fraud manifests in various forms of intentional misreporting. One method is prematurely recording anticipated future sales that have not yet occurred. This overstates current revenues as managers make aggressive assumptions about projections. Another approach is intentionally using inaccurate depreciation schedules that underestimate the decline in asset values over time. This overstates net worth by keeping asset values artificially high. Companies also commit fraud by omitting or hiding liabilities and obligations from the balance sheet. This materially understates total liabilities and overstates equity. Off-balance sheet items obscured can include debt, litigation risks, or losses on assets. Incorrect accounting for transactions with related parties is another tactic. Transfer pricing or terms between affiliated entities can be manipulated to shift revenues to a certain period or entity to achieve reporting goals. Complex structured transactions like special purpose entities are also used to commit accounting fraud. SPEs can be used to conceal losses or liabilities in ways that distort financial statements. While metrics like revenues, expenses, assets and liabilities are most misstated, any aspect of the financial statements can be altered. Footnotes, disclosures, ratios, and audit opinions can also be falsified or omitted. Such deception is intended to mislead investors, lenders, and other stakeholders regarding the underlying financial health and prospects of a company. Trust in financial reporting is foundational to the proper functioning of capital markets. To detect and deter financial statement fraud, alert governance and stringent internal controls are crucial. Red flags must be identified early and transparently communicated. Strict accounting standards must be enforced evenly across organizations and jurisdictions. Independent external auditing plays a vital role in verifying the accuracy and completeness of financial statements. However, auditors can also be complicit or successfully deceived by fraudulent acts. Regulators must therefore apply rigorous oversight of auditors and their clients. Ultimately, the prevention and detection of financial statement fraud requires a multilayered effort across companies, auditors, standards setters, and securities regulators. Though no system is foolproof, upholding stringent governance and accountability minimizes the likelihood and impact of accounting deception. A strong ethical culture across all levels of personnel acts as the first line of defense. Audit techniques to assess fraud: While audits are not designed to catch every instance of fraud, auditors have an obligation to detect material misstatements in a company's financial statements resulting from either fraud or error. Accepted auditing standards mandate specific procedures during each audit to identify potential fraud. Understanding some of these techniques can help you better prepare for your organization's audit. Auditing standards require that audit teams hold a brainstorming session at the start of each engagement specifically to discuss fraud risks. Led by the audit partner, the meeting provides time to consider how fraud could occur at the company. Fraud specialists often participate to share insights on fraud schemes at similar organizations and industries. This highlights specific fraud risk factors unique to the client. A common approach to detect fraud is to test the company's journal entries. Committing major financial statement fraud frequently requires improper adjustments to the books, so auditors scrutinize journal entries for anomalies. After gaining an understanding of the company's controls and policies, auditors select a sample of journal entries to examine. They typically target large, unusual, late, or otherwise suspicious entries, especially those made by upper management. Auditors then request supporting documentation to verify each selected entry is legitimate. The brainstorming session sets a tone of professional skepticism. Combining this mindset with targeted journal entry testing allows auditors to fulfill their responsibility to detect material misstatements in financial reporting. While audits cannot realistically uncover all fraud, these procedures help assess the risk of fraud and design an audit response to uncover material misrepresentations. Understanding common antifraud techniques can help companies better prepare for the audit process. Conclusion: In summary, organizations must balance enabling business-critical systems while securing sensitive data through a comprehensive information security management framework. While external audits cannot realistically detect all fraud, required procedures help assess the risk of material misstatements in financial reporting resulting from intentional acts or error. With stringent governance, internal controls, and a culture of accountability and ethics, companies can detect and deter fraud while building stakeholder trust through accurate financial reporting. Maintaining integrity across information systems and financial statements remains essential for business resilience and capital market confidence. References Craja, P., Kim, A., & Lessmann, S. (2020). Deep learning for detecting financial statement fraud. Decision Support Systems, 139, 113421. Hopwood, W. S., Leiner, J., & Young, G. R. (2007). Forensic accounting and fraud examination. (No Title). Montgomery, D. D., Beasley, M. S., Menelaides, S. L., & Palmrose, Z. V. (2002). Auditors' new procedures for detecting fraud. Journal of Accountancy, 193(5), 63. Singh, A. N., Gupta, M. P., & Ojha, A. (2014). Identifying factors of “organizational information security management”. Journal of Enterprise Information Management, 27(5), 644-667. Policies and Procedures3 Policies and Procedures Table of contents Organization: XYZ Financial Services4 Responsibilities5 Major Provisions and Section 404 Compliance of SOX5 Provisions5 Compliance Issues6 Approaches to Compliance6 Potential Need and Procedure for Expert Witness Affiliation and Utilization6 Potential Need7 Procedure7 Procedures for Preparation and Participation in Forensic Computer Investigations7 Preparation8 Participation in Investigation8 Procedures and Policies on the Use of Law Enforcement Networks and Database8 Procedures8 Policies9 Summary9 References12 Organization: Financial Services · Overview: A well-known financial organization called XYZ Financial Services offers a variety of services, such as banking, insurance, investment management, and wealth consulting services. Millions of consumers are served by XYZ Financial Services, which has a significant market share. The company provides top-notch financial solutions while upholding the greatest standards of morality, honesty, and client pleasure. · Mission: By offering creative, dependable, and individualized financial solutions, it is our purpose to enable people and organizations to accomplish their financial goals. Through our knowledge and dedication to quality, we hope to develop enduring connections with our clients and provide them with outstanding value. · Vision: Being renowned for our steadfast dedication to client success, ethics, and financial innovation will help us become the most dependable and chosen provider of financial services. Core Values: · Integrity: In all our dealings, we respect the strictest moral principles, honesty, and openness. · Customer Centricity: Everything we do is centered on serving the requirements and interests of our clients. · Excellence: We aim for constant advancement, inventiveness, and the greatest level of quality in our offerings. · Teamwork: We promote a cooperative and diverse workplace where the contributions of each employee are recognized. · Accountability: We assume accountability for our choices and results, fostering openness and confidence among all parties involved. Responsibilities All staff members, including management, are accountable for following the rules and regulations listed in this document. The management group oversees making sure that these rules are adequately conveyed to all pertinent employees and of monitoring and enforcing compliance with these policies (Park, 2023). Major Provisions and Section 404 Compliance of SOX To improve corporate governance and financial reporting transparency in public corporations, the Sarbanes-Oxley Act (SOX) of 2002 was passed. Section 404 of SOX is particularly essential since it mandates the establishment and maintenance of efficient internal controls over financial reporting by public corporations and their auditors. The main Section 404 requirements and compliance challenges are as follows: Provisions · Section 404(a): Management's Responsibility: Establishing and maintaining proper internal controls over financial reporting is the responsibility of management, which also must evaluate the efficacy of the controls. · Section 404(b): Auditor's Attestation: external auditors, who must then provide a report, must assess the efficacy of the company’s internal controls over financial reporting. Compliance Issues · Documenting Internal Controls: A company's internal control processes, including the design and implementation of controls linked to financial reporting, must be well documented. · Assessment of Internal Controls: Management must assess the efficiency of internal controls and pinpoint any significant flaws. · Auditor’s Evaluation: External auditors, who must also provide their assessment, must evaluate the efficacy of the company’s internal controls independently. Approaches to Compliance · Top-Down Risk Assessment: Companies assess and priorities possible risks to financial reporting using a risk-based approach, concentrating on the most important controls. · Continuous Monitoring and Testing: Companies set up ongoing monitoring procedures and regularly evaluate internal controls to make sure they work. · COSO Framework: The Committee of Sponsoring Organizations (COSO) framework is widely used by businesses as a best practice for developing, implementing, and evaluating internal controls. Potential Need and Procedure for Expert Witness Affiliation and Utilization Expert witnesses may be required in specific judicial proceedings to offer their specialized expertise, opinions, or analyses. The process and potential requirements for expert witness affiliation and use include: Potential Need · Complex Matters: Expert testimony may be necessary in cases requiring technological, financial, or scientific complexity to help the court comprehend complicated matters. · Industry Expertise: The knowledge of the court can be improved by expert witnesses' views and interpretations that are exclusive to their field of competence. · Validation of Claims: Expert testimony may support or refute statements presented by either side, which may have an impact on the court's ruling. Procedure · Identification and Selection: The legal team determines the precise knowledge needed for the issue, investigates possible specialists, or asks for recommendations. · Evaluation and Qualification: The qualifications, experience, and prior testimony in pertinent instances are used to evaluate the possible experts. · Engaging the Expert: The legal team signs an engagement agreement with the chosen expert that specifies the expert's position, salary, and secrecy. · Preparation: The