Auditing Theory Class Instructions Southeastern Federal Savi

Auditing Theory Class instructions southeastern Federal Savings Loansb

This case study presents a fraud perpetrated by a mortgage counselor at a branch office of Southeastern Federal Savings & Loans (Southeastern) that resulted in Southeastern losing $110,000 in cash outright and $93,149 in staff time investigating the fraud. The senior management of Southeastern, the FBI, and the firm’s attorneys incurred additional costs. This fraud occurred because established policies and procedures were not followed and that additional controls needed to be implemented.

Jane Davenport, the perpetrator of the fraud, was initially hired as a teller, became a savings counselor, and lastly, a mortgage counselor. In her five years of employment at Southeastern, fellow employees and customers trusted her. Ms. Davenport violated their trust by stealing from customers’ accounts. She started the fraud by forging signatures on withdrawal slips and stealing from an older couple’s two accounts, then repaid the money through a classic lapping scheme. She targeted Ms. Sampson, a customer with seventeen accounts, exploiting her disorganized accounts and trusting relationship to transfer and alter account information, including closing CDs, changing addresses, and creating fraudulent statements.

Several other customers also suffered losses due to Ms. Davenport’s actions, with total combined losses exceeding $94,000. Her fraud was discovered after three years when Ms. Sampson complained about account problems. Ms. Davenport confessed to the theft, claiming to help her mother with financial issues. An internal audit was conducted, focusing on gathering evidence, reviewing transactions, signatures, and account activities to determine losses and policy violations. The FBI and internal auditors collaborated to identify fraudulent activity, culminating in a detailed list of 241 fraudulent transactions totaling approximately $465,303.58.

Paper For Above instruction

The investigation into the Southeastern Federal Savings & Loans fraud offers vital insights into how auditors can effectively demonstrate the review of all affected accounts, gather evidentiary work papers, and distinguish between fraud investigations and regular audits. It underscores the importance of meticulous documentation, sound internal controls, and comprehensive review procedures to uphold integrity and accountability in financial institutions.

Demonstrating that all accounts suffering losses were reviewed

To substantiate that all affected accounts and potential accounts were thoroughly reviewed, auditors need to employ a combination of systematic sampling, comprehensive database analysis, and cross-referencing procedures. First, obtaining a complete transaction history for each customer account suspected of fraud is essential. This involves extracting detailed data from the bank's core banking system, including all deposits, withdrawals, transfers, and any adjustments over the relevant period.

Utilizing data analytics tools can aid in identifying anomalous patterns or outliers, such as unusual withdrawal amounts or frequency. Additionally, auditors should review account linkage and activity patterns across multiple accounts held by the same customer, as exemplified by Ms. Sampson’s numerous accounts. Cross-referencing signatures, signature cards, and transaction authorizations can also reveal inconsistencies that indicate potential fraudulent activity.

Auditors should create a comprehensive list of all accounts associated with the suspected individual, including any accounts that had unusual activity, even if not initially flagged. Documentation of this process, including detailed account review logs, databases extracts, and audit trail analyses, helps demonstrate that all potentially affected accounts, both actual and potential, were examined systematically.

Work papers: Supporting a fraud case vs. supporting a regular audit

Work papers serve as the evidentiary backbone for both fraud investigations and regular audits but differ significantly in scope, detail, and purpose. In a fraud case, work papers must document the specific irregularities, suspicions, and investigative procedures that point toward fraudulent activity. They include copies of signed documents, transaction logs, signatures, forensic analysis of altered documents, and correspondence with witnesses or account holders.

In contrast, regular audit work papers primarily aim to verify compliance with established policies, internal controls, and regulatory requirements. They typically contain checklists, test results, control evaluations, and sample testing documentation. While regular audit work papers focus on confirming adherence to policies, fraud work papers emphasize uncovering irregularities, tracing the source of theft, and establishing intent.

Key differences include:

• Level of detail: Fraud work papers are exhaustive, documenting every piece of evidence, irregular transaction, and investigative step, whereas regular audit work papers follow a defined audit program focusing on material controls and compliance areas.
• Focus: Fraud work papers concentrate on anomalies and suspicious activities; audit work papers on procedural compliance and control effectiveness.
• Supporting evidence: Fraud investigations require corroborative evidence such as forensic signatures analysis, altered documents, and confession statements; audits rely more on sampling, control testing, and policy verification.

Reviewing work papers for this case

When reviewing work papers related to this case, the focus should be on evaluating the completeness, accuracy, and adherence to investigative procedures. The review should verify that all relevant accounts and transactions have been examined, including cross-referencing signatures, transaction authorizations, and account activity patterns.

Assess whether the work papers clearly document the steps taken during the investigation, such as data extraction, suspicious activity identification, and follow-up interviews. Verify whether evidence collection meets legal and procedural standards and whether there is consistency between the transaction records, signature analyses, and Ms. Sampson’s account statements. The review should also assess whether the documentation includes sufficient detail to support the fraud allegations and facilitate prosecution.

Furthermore, it is essential to check if the work papers contain logical links between the evidence collected and the conclusions drawn. For example, matching withdrawal tickets with signature cards, verifying the legitimacy of altered documents, and correlating Ms. Sampson’s testimony with transaction logs. Recognizing gaps or inconsistencies in documentation might indicate shortcomings in the investigation or opportunities for further analysis.

Sample internal audit program for this case

• Objective: To verify the extent of Ms. Davenport’s fraud and assess internal controls related to account handling.
• Step 1: Obtain a complete list of all accounts associated with Ms. Davenport using bank records and linkage analysis.
• Step 2: Extract transaction histories for all identified accounts for the period Ms. Davenport was employed.
• Step 3: Review and compare withdrawal tickets, deposit slips, signature cards, and checks against signatures and authorized transaction lists.
• Step 4: Identify irregularities such as forged signatures, unrecognized transactions, or alterations in account statements.
• Step 5: Collaborate with forensic specialists to analyze signatures and document authenticity.
• Step 6: Interview Ms. Sampson and review her account activity in detail to confirm transactions made by her.
• Step 7: Quantify total losses attributable to Ms. Davenport’s activities by summing confirmed fraudulent transactions.
• Step 8: Recommend control improvements such as enhanced signature verification, segregation of duties, and transaction monitoring mechanisms.
• Step 9: Document all findings comprehensively, including digital records, witness statements, and forensic analyses, to support legal prosecution and internal controls enhancement.

Recommended internal controls based on case review

• Stringent signature verification procedures: Require multiple signatories for account changes and withdrawals exceeding certain thresholds.
• Segregation of duties: Separate responsibilities for transaction authorization, record-keeping, and review to prevent concentration of control.
• Enhanced transaction monitoring: Implement software tools that flag unusual activities such as large transfers, frequent changes of account details, or early CD closures.
• Password and access controls: Restrict system access based on roles, with audit logs maintaining traceability of actions performed.
• Regular internal audits and surprise checks: Conduct periodic reviews of high-risk accounts and random transaction sampling.
• Staff training and ethical standards: Promote awareness of fraud risks and establish a whistleblower policy to encourage reporting suspicious activity.
• Clear policies for handling exclusive trusted relationships: Require supervisory review and documentation for transactions initiated through close contacts or trusted accounts.

In conclusion, the case illustrates the importance of robust internal controls, comprehensive review procedures, and detailed work papers to prevent fraud and support forensic investigations. Implementing and maintaining these measures can significantly reduce the risk of financial misconduct within banking operations.

References

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• Committee of Sponsoring Organizations of the Treadway Commission (COSO). (2013). Internal control—integrated framework.
• Reding, K., & Jenkins, S. (2020). Fraud risk management: A practical guide. Wiley.
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• Singleton, T. W., & Singleton, A. J. (2019). Fraud auditing and forensic accounting. Wiley.
• FBI. (2020). Financial crime investigations and procedures. Federal Bureau of Investigation Publications.