ACCT 660 Week 2 Discussion Board Forum 1 Replies Example

Discussion Board Forum 1 Replies: Responding to Classmates on Data Analytics

ACCT 660 Information Technology and Fraud, Discussion Board Forum 1 Replies

Thread by [Student Name]

The classmates and their threads are composites; the studies and book cited are real.

Reply to Marcus

Marcus, you argued that continuous monitoring will soon make the annual audit unnecessary, since software can test every transaction as it posts instead of months later. I agree that the technology is ready to run all year, and Nigrini (2011) shows how the same tests we read about in the first chapters, such as data profiles and digit tests, can be automated and repeated on each new batch of data.

I would distinguish two things your thread combined, though. Vasarhelyi et al. (2004) describe continuous assurance as a set of analytic monitoring layers that compare transactions, controls and key metrics with expected models and generate alerts when something departs from them. Monitoring of that kind belongs to management; it tells the company that something looks wrong. An audit adds an independent party who evaluates the evidence and reports to outsiders. A monitoring system that management owns cannot vouch for management. If the fraud is committed by senior executives, as many large frauds are, the people receiving the alerts are the people who need to be watched. That is why the standards governing audits insist on independence: the value of an auditor's opinion comes from the auditor's freedom to reach a conclusion management dislikes, and a system configured and monitored by management cannot supply that freedom however sophisticated its analytics may be.

So I see continuous monitoring as making the audit better rather than unnecessary, since auditors could rely on well-designed monitoring and spend their time on the exceptions. My question for you: in your view, who should receive and resolve the alerts so that the system still works when the person being flagged is a senior manager?

Reply to Priya

Priya, your thread said that first-digit tests catch invented numbers because people cannot imitate randomness. That claim has real support. Hill (1988) asked people to write down numbers they made up and found that their first digits were spread far more evenly than the expected pattern, with too few amounts starting with 1. A bookkeeper inventing invoices is likely to make the same mistake.

I would add why the expected pattern exists in the first place, because it explains when your argument holds. Hill (1995) showed mathematically that the pattern arises when numbers come from mixing many different distributions, which is what happens when invoice amounts combine quantities, prices and many vendors. The test is therefore strongest for large sets of transaction amounts produced by ordinary business activity, and weaker for small sets or for amounts limited to a narrow range, such as payroll for one job grade. It also means a test can fail to catch invented numbers when the fraudster invents only a few, because a handful of fabricated invoices will not shift the distribution of a file with tens of thousands of legitimate ones. In that situation, tests aimed at individual records, such as searches for duplicates or for amounts just below an approval limit, do more work than the first-digit test.

That leaves an interesting question for you. If a fraudster knew about the test and used software to generate amounts that followed the expected pattern, which of the other tests from our reading, such as duplicate amounts or round numbers, would you expect to catch the scheme instead?

References

Hill, T. P. (1988). Random-number guessing and the first digit phenomenon. Psychological Reports, 62(3), 967-971. https://doi.org/10.2466/pr0.1988.62.3.967

Hill, T. P. (1995). A statistical derivation of the significant-digit law. Statistical Science, 10(4), 354-363. https://doi.org/10.1214/ss/1177009869

Nigrini, M. J. (2011). Forensic analytics: Methods and techniques for forensic accounting investigations. Wiley.

Vasarhelyi, M. A., Alles, M. G., & Kogan, A. (2004). Principles of analytic monitoring for continuous assurance. Journal of Emerging Technologies in Accounting, 1(1), 1-21. https://doi.org/10.2308/jeta.2004.1.1.1