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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Auditing vs Fraud Examination vs Forensic Accounting

In general terms, fraud is an intentional deception, whether by omission or commission, to realize a gain. Under common law, fraud includes four essential elements:

  • A material false statement
  • Knowledge that the statement was false when it was spoken
  • Reliance on the false statement by the victim
  • Damages resulting from the victim’s reliance on the false statement

In the broadest sense, fraud can encompass any act for gain that uses deception as its principle technique. This deception is implemented through fraud schemes, specific methodologies used to commit and conceal the fraudulent act. The legal definition of fraud is the same, whether the incidence is criminal or civil. The difference is that criminal cases must meet a higher burden of proof.

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Financial Shenanigans: Earnings Manipulation (Part 2)

In my previous post I mentioned the brief summary of accounting shenanigans identified by Howard Schilit in his book Financial Shenanigans used by management to manipulate earnings, cash flow and key metrics.
Below is the summary of various methods management uses to manipulate the earnings through the 7 Earnings manipulation shenanigans.

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Financial Shenanigans (Part 1)

ShenanigansSecret or dishonest activity or maneuvering

Recently I was reading Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports. The book by Howard Schilit and Jeremy Perler sheds the light on various Shenanigans (methods/techniques) which management uses to cook the books to make businesses look better than they actually are.

It’s a good read for both investors and auditors as the authors have used real examples like that of Enron, WorldCom, Tyco, etc. and other lesser known corporate scams detailing how they were perpetuated before they saw the light of day and how one could have spotted the false accounting in these cases. The Shenanigans given are:

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