Adding Mathematical Statistic to the Auditor's Tool Box

• In Event: Teaching Cases II

Abstract

This case was an actual fraud discovered by the lead author. Auditors already have many procedures and practices to ferret out errors and fraud – but, lest they become too predictable, should always retain some ‘element of surprise’ in their work. The surprise, non-standard audit procedures used in this case caught the perpetrators completely off-guard. Unlike the fraudulent evidence submitted to the auditors, which was always carefully crafted and promptly provided, the perpetrators were unprepared for surprise questioning. After observing certain social and quantitative anomalies, moreover, a simple-to-use probability model was used to determine whether certain observations of teller and loan activities were likely. The results of those tests, though inconclusive, provided a more focused framework for making use of limited sampling resources that included the identified anomaly. Notably, the multiple and extensive frauds were apparently not carried out strictly for pecuniary gain – but as part of some elaborate intellectual game.

Author

• Eddward Herron, University of Wisconsin - La Crosse