Identifying Frauds Using Correlation Coefficient

Correlation is a relationship between two things (variables) that tend to vary or move together. There is usually some logical connection between the two things/variables.

How much the two variables are connected can be determined by calculating the correlation coefficient, which is denoted as ‘r’.

correlation coefficient formula

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Largest Subset & Growth Tests

The first analysis of any data set need not use sophisticated mathematics or statistics. The goal of these test is to find subsets that are highly inflated due to the error or fraud.

Largest Subset Test

The largest subsets test uses two fields, one with transaction or balance numbers (such as amount, inventory counts, vote counts, population counts) and another field to indicate the subset (e.g., vendor number, credit card number, or branch number). Subset is a group of records that have something in common.

The data can often be divided into several subset groupings. For example, accounts payable data could be grouped by vendor or by the type of purchase (purchase order, no. purchase order) or by time. There are often a few different ways that data can be divided into subsets. For inventory data the grouping could be by location. For airline ticket refunds or retail customer refunds the groupings could be the credit card that received the refund.

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Luhn Algorithm: A Little Known Tool for Auditors

Buying with Credit CardLuhn Algorithm also known as ‘modulus 10’ or ‘mod 10’ algorithm, was created by Hans Peter Luhn in 1954.
It is widely used in Credit/Debit card numbers, IMEI numbers, and Canadian Social Insurance numbers.

What is Luhn Algorithm?

To understand what Luhn algorithm is, we first need to understand what is ‘modulo’. Modulo or Modulus is the remainder after dividing the number with another number. Consider the example 7 divided by 3 has; quotient 2 and remainder 1.
Therefore, modulo 10 equal 0 means after dividing the number with 10, the remainder should be 0. In simple terms the number (dividend) should be a multiple of 10 (divisor).

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Relative Size Factor: Finding Outliers

In my previous article Auditing: Accounts Payable / Vendor Payments I spoke about Relative Size Factor (RSF) and how it can used to identify isolated outliers in vendor invoices. In this article I’ll try to show how RSF can be calculated in Excel.

The RSF test is an important tool for detecting errors. RSF test compares the top two amounts for each subset and calculates the RSF for each. The test identifies subsets where the largest amount is out of line with other amounts for that subset.

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Spreadsheets: Auditing & Validating (Part 2)

00_Spreadsheet AuditIn the previous post Spreadsheets: Risk, I mentioned few of the risks associated with spreadsheets. In this post I’ll try to show some excel tools which can help  in detecting errors and frauds in Excel spreadsheets.

In the late 1990’s “Poor control over spreadsheets at Jamaican indigenous banks contributed to management information and external reporting problems (i.e., P&L distortions) that contributed to the banks’ management and external regulators losing sight of the banks’ true positions and exposures. Which led to collapse of entire Jamaican Banking System.

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Auditing: Accounts Payable / Vendor Payments

Accounts payable AuditAccounts Payable is one of the crucial area in audit. As it represents the monies owed by the organization to its creditors for supply of goods and services. Also for a fraudster who is looking to steal from the business, accounts payable is an easy target, if proper controls are not there.

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A Brief History of Auditing

The term “Audit” is derived from the Latin term “Audire” which means “to hear”, because in ancient times auditors listened to the oral reports of responsible officials to owners or those having authority, and confirmed the accuracy of the reports. Over the years the role evolved to verify written records also.

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