Salami Fraud and CAATTs

Rounding error test.

Failure to properly account for the rounding difference above

can result in an imbalance between the total (control) figure and the sum of the
detail figures for each account. Poor accounting for rounding differences can also
present an opportunity for fraud.
Salami Fraud. Rounding programs are particularly susceptible to the so-called

salami fraud. This fraud tends to affect large numbers of victims, but each in a
minimal way.
The fraud scheme takes its name from the analogy of slicing a large salami (the
fraud objective) into many thin pieces. Each victim gets one of these small pieces
and is unaware of being defrauded. For example, a programmer, or someone with
access to the rounding program, can modify the rounding logic, thus perpetrating a
salami fraud, as follo ws: at the point in the process where the algorithm should
increase the current customers account (that is, the accumulator value is > +.01),
the program instead adds one cent to another accountthe perpetrators account.
Although the absolute amount of each fraud transaction is small, given the
hundreds of thousands of accounts that could be processed, the total amount of the
fraud can become significant over time.
Most large public accounting firms have developed special audit software that can
detect excessive file activity. In the case of the salami fraud, there would be
thousands of entries into the computer criminals personal account that the audit
software may detect. A clever programmer may funnel these entries through
several intermediate accounts in order to disguise this activity. The accounts are
then posted to a smaller number of intermediate accounts and finally to the
programmers personal account. By using many levels of accounts in this way, the
activity to any single account is reduced, and the audit software may not detect it.
There will be a trail, but it can be complicated. The auditor can also use audit
software to detect the existence of unauthorized (dummy) files that contain the
intermediate accounts used in such a fraud.
White Box Testing Techniques
5 Computer-Assisted Audit Tools and Techniques (CAATTs) approaches: the
test data method, base case system evaluation, tracing, integrated test facility, and
parallel simulation.
The test data method is used to establish application integrity by processing
specially prepared sets of input data through production applications that are under
review. The results of each test are compared to predetermined expectations to
obtain an objective assessment of application logic and control effectiveness. To
perform the test data technique, the auditor must obtain a copy of the production
version of the application. In addition, test transaction files and test master files
must be created. As illustrated in the figure, test transactions may enter the system
from magnetic tape, disk, or via an input terminal. Results from the test run will be
in the form of routine output reports, transaction listings, and error reports. In
addition, the auditor must review the updated master files to determine that
account balances have been correctly updated. The test results are then compared
with the auditors expected results to determine if the application is functioning
properly. This comparison may be performed manually or through special computer
software.
Creating Test Data. Creating test data requires a complete set of valid and invalid
transactions. Incomplete test data may fail to explore critical branches of
application logic and error checking routines. Test transactions should be designed
to test all possible input errors, logical processes, and irregularities.
Base case system evaluation (BCSE) is a variant of the test data approach.
BCSE tests are conducted with a set of test transactions containing all possible
transaction types. These are processed through repeated iterations during systems
development testing until consistent and valid results are obtained. These results
are the base case. When subsequent changes to the application occur during
maintenance, their effects are evaluated by comparing current results with base
case results.
Tracing performs an electronic walk-through of the applications internal logic. The
tracing procedure involves three steps:
1. The application under review must undergo a special compilation to activate the
trace option.
2. Specific transactions or types of transactions are created as test data.
3. The test data transactions are traced through all processing stages of the
program, and a listing is produced of all programmed instructions that were
executed during the test.
The integrated test facility (ITF) approach is an automated technique that

enables the auditor to test an applications logic and controls during its normal
operation. The ITF involves one or more audit modules designed into the application
during the systems development process. In addition, ITF databases contain dummy
or test master file records integrated among legitimate records. Some firms create
a dummy company to which test transactions are posted. During normal operations,
test transactions are merged into the input stream of regular (production)
transactions and are processed against the files of the dummy company.
ITF audit modules are designed to discriminate between ITF transactions and
production data. This may be accomplished in a number of ways. One of the
simplest and most commonly used is to assign a unique range of key values
exclusively to ITF transactions.
For example, in a sales order processing system, account numbers between 2000
and 2100 are reserved for ITF transactions and will not be assigned to actual
customer accounts. By segregating ITF transactions from legitimate transactions in

this way, ITF test data does not corrupt routine reports that the application
produces. Test results are produced separately in digital or hard-copy form and
distributed directly to the auditor. Just as with the test data techniques, the auditor
analyzes ITF results against expected results.
Parallel simulation involves creating a program that simulates key features or
processes of the application under review. The simulated application is then used to
reprocess transactions that the production application previously processed. The
results obtained from the simulation are reconciled with the results of the original
production run to determine if application processes and controls are functioning
correctly.
Simulation packages are commercially available and are sometimes a feature of
generalized audit software (GAS)1. The steps involved in performing parallel
simulation testing are outlined in the following section.
1. The auditor must first gain a thorough understanding of the application under
review. Complete and current documentation of the application is required to
construct an accurate simulation.
2. The auditor must then identify those processes and controls in the application
that are critical to the audit. These are the processes to be simulated.
3. The auditor creates the simulation using a fourth-generation language or
generalized audit software.
4. The auditor runs the simulation program using selected production transactions
and master files to produce a set of results.
5. Finally, the auditor evaluates and reconciles the test results with the production
results produced in a previous run.
Simulation programs are usually less complex than the production applications they
represent. Because simulations contain only the application processes, calculations,
and controls relevant to specific audit objectives, the auditor must carefully
evaluate differences between test results and production results. Differences in
output results occur for two reasons: (1) the inherent crudeness of the simulation
program and (2) real deficiencies in the applications processes or controls, which
the simulation program makes apparent.
Substantive tests are so named because they are used to substantiate dollar
amounts in account balances. Substantive tests include but are not limited to the
following:
1 Although GAS can be used for testing internal controls, it is primarily a substantive
testing technique. For this reason, this technology is discussed in the section that
deals with substantive testing.
1. Determining the correct value of inventory.

2. Determining the accuracy of prepayments and accruals.
3. Confirming accounts receivable with customers.
4. Searching for unrecorded liabilities.
Before substantive tests can be performed, these data must first be extracted from
their host media and presented to the auditor in usable form. The two CAATTs
examined in this section assist the auditor in selecting, accessing, and organizing
data used for performing substantive tests.
Embedded audit module (EAM) techniques use one or more programmed
modules embedded in a host application to select, for subsequent analysis,
transactions that meet predetermined conditions.
As the host application processes the selected transaction, a copy of it is stored on
an audit file for subsequent review. The EAM approach allows material transactions
to be captured throughout the audit period. The auditor retrieves captured
transactions at period-end or at any time during the period, thus significantly
reducing the amount of work the auditor must do to identify significant transactions
for substantive testing.
Generalized Audit Software (GAS) is the most widely used CAATT for IS auditing.
GAS allows auditors to access electronically coded data files and perform various
operations on their contents. Audit Command Language (ACL) and Interactive Data
Extraction and Analysis (IDEA) are currently the leading products, but others exist
with similar features. The following audit tasks can be performed using GAS:
1. Footing and balancing entire files or selected data items.
2. Selecting and reporting detailed data contained on files.
3. Selecting stratified statistical samples from data files.
4. Formatting results of tests into reports.
5. Printing confirmations in either standardized or special wording.
6. Screening data and selectively including or excluding items.
7. Comparing two files and identifying any differences.
8. Recalculating data fields.
The widespread popularity of GAS is due to four factors: (1) GAS languages are easy
to use and require little IT background on the part of the auditor, (2) GAS may be
used on any type of computer because it is hardware independent, (3) auditors can
perform their tests on data independent of client IT professional, and (4) GAS can be
used to audit the data files of many different applications (in contrast with EAMs,
which are application specific).

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What is salami fraud and how does it work?

What are some techniques used for computer-assisted audit tools and testing (CAATTs)?

Rounding error test.

Failure to properly account for the rounding difference above

Salami Fraud. Rounding programs are particularly susceptible to the so-called

The integrated test facility (ITF) approach is an automated technique that

customer accounts. By segregating ITF transactions from legitimate transactions in

1. Determining the correct value of inventory.

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