Optimizing Financial Controls: The Role of Statistical Sampling in Fraud Prevention

  • The Sampler is used to detect fraud and test your company’s procedures
  • You can quickly, efficiently, and randomly select transactions for testing
  • The single-file design architecture lets you access all transactions
  • The Sampler is to Financial Accounting what ISO 9000 is to Operations Accounting
  • The Sampler allows you to quantify the attributes of your financial procedures and information
  • If you test periodically, you can detect trends. These trends result from changes in personnel or operations that affect financial accounting

Recommendation:

We strongly recommend you consult with your CPA adviser for sampling and to help you determine how to best use this tool.

From the Plus & Minus Help System:

Audited companies, whether internal or external audits suffer less severe fraud losses than unaudited ones, while the overall rate of occupational fraud has changed little over the years.

Employees and others who commit fraud have long relied on management’s inability to see what’s going on right under their noses. Why? Because it has been too difficult and expensive to sift through the enormous volume of business transactions taking place each day. Too often the intensive record-screening necessary to detect improprieties slows business processes and consumes funding and staffing. At some point, the “cure” becomes worse than the “disease.”

Plus & Minus designed the Sampler based on two articles in the April 2002 issue of The Journal of Accountancy, “Occupational Fraud, the Audit as Deterrent” by Joseph T. Wells and “Root Out Financial Deception” by W. Steve Albrecht and Conan C. Albrecht.  We also used “Audit Sampling: an Introduction” by Dan M. Guy, Douglas R. Carmichael, and Ray Whittington, published by Wiley.

Asset misappropriations are the bane of small businesses and can be material or even catastrophic. Nine out of ten misappropriations involve the cash account.

There are three actions to minimize these risks:

  1. Adequate fidelity insurance to cover large losses. Insurance will require you to have adequate controls before they will insure you against a loss
  2. Monthly bank statements are delivered to the owners or managers, who should review them in detail for possible irregularities. In today’s world, owners or managers can check bank statements online
  3. An independent review of the cash accounts by CPAs (bank reconciliation review)

Over the years, several Plus & Minus customers experienced losses of over $100,000. The reason was always the same: one person handled the cash. Unfortunately, theft of cash is usually not discovered until the loss is over $100,000.

How often to sample?

Once a quarter is more than adequate for most companies. For a company that does a hundred sales and purchase orders a day, the sample test should not take more than 4 hours.

What does the Sampler do

You can select transactions in two ways:

  1. Using a random number generator (discovery sampling)
  2. By nth item

The sampler groups the selection and stratifies each group. You can test each group for attributes applicable to that group, and the sampler presents them to you either printed or in a spreadsheet, ready for testing.

Additionally, Sampler:

  • Does not require you to know statistical sampling
  • Is a tool that you can quickly and easily use to test procedures and controls on your financial information
  • Is a tool your internal staff, your company CPA, or Plus & Minus can use either working together or independently