Typical Fraud Schemes and Related Controls
Function/Activity
Procurement/
Purchasing
Indicators
Controls to Prevent or Detect

Significant internal control
weaknesses.
Corporate code of ethics
prohibiting the acceptance of
kickbacks.


Cost of purchases is higher than
prior years.
Corporate policy prohibiting the
acceptance of anything of value.


Cost of purchases is higher than
budget.
Establishing and approving longterm contracts with major
vendors.

Purchases from particular
vendors are higher than normal.


Cost of purchases is higher than
market values.
Require that only approved
vendors are paid for purchases,
and only based on production
activity.

Requiring mandatory vacations

Purchasing agent’s standard of
living has increased.




Kiting (which refers to the 
recording of a deposit
from an interbank transfer
in this period, while failing

to record the related
disbursement until the
next period)

Lapping (which refers to

the concealment of the
first customer’s
payments, then allocating

the second customer’s
payment to the account of
the first, and the third to

the account of the
second, etc.)

Unjustified buildup of inventory or 
an increase in inventory turnover
in days.

Buyer is not taking any vacations
and refused a promotion.
Buyer accompanies a vendor on
regular excursions.
Significant deposits in a bank
account towards the end of a
period.
Requiring frequent rotation of
duties.
Maintaining proper segregation of
duties between the ordering,
receiving, payable, and
accounting functions.

Typically, the auditor would
examine a schedule of bank
transfers for the week before and
week after period end searching
for checks that should have been
listed as outstanding in the prior
period but were not.

Mandatory vacations and/or
rotations of duties.

Segregation of duties between
sales, collections, and book
keeping.

Regular confirmations of
customers’ balances and
immediately investigating
differences.
Management’s pre-occupation
with increased financial
performance.
An otherwise poor cash or current
assets position.
Several discrepancies between
the books and customers’
confirmations.
Lack of adequate segregation of
incompatible duties.
Employees failing to take
vacations and/or refusing
promotions.
Unexplained lifestyle
Senior Management
Sales
Inventory

Managers regularly assume
subordinates’ duties

Managers subject to formal
performance reviews.

Managers dealing in matters
outside their normal scope of
responsibility.

Strong Board and Audit
Committee oversight

Managers failing to comply with
corporate directives and
procedures.

Ethical management

Management’s pre-occupation with
increased financial performance.

A domineering management

Generous performance-based
reward systems.

Compensation is significantly
dependent on sales and/or
profitability.

Strong controls

Significant returns after period end.

No shipping documents available
for sales invoices.

An increase in bad debts.

Poor controls over the
warehousing.

Strong controls

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