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Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Chapter 06
Employee Fraud and the
Audit of Cash
"Rather fail with honor than succeed by fraud."
--Sophocles (496-406 BC)
6-2
Learning Objectives
1.
2.
3.
4.
5.
6.
7.
Define and explain the differences among several kinds of employee fraud
that might occur at an audit client.
Identify and explain the three conditions (i.e., the fraud triangle) that often
exist when a fraud occurs.
Describe techniques that can be used to prevent employee fraud.
Describe the control activities over the receipt and disbursement of cash.
Describe the types of substantive procedures that are conducted during the
audit of cash.
Discuss actual cash fraud cases and describe how the schemes were
uncovered.
Describe some extended procedures for detecting employee fraud schemes
involving cash.
6-3
6-4
Experience sleeplessness
Drinking too much
Take Drugs
Become irritable easily
Cant relax
Get defensive
Cant look people in the eye
Sweat excessively
Go to confession
Find excuses and scapegoats for mistakes
Work standing up
Work alone
Work late frequently
6-5
Characteristics of Fraudsters
Exhibit 6.1
Fraud Elements
6-8
Motivation
A motive is some kind of pressure a person
experiences and believes to be unshareable with
friends and confidants
Actual or perceived need for money (Economic motive)
Habitual criminal who steals for the sake of stealing
(Psychotic motive)
Committing fraud for personal prestige (Egocentric
motive)
Cause is morally superior, justified in making others
victims (Ideological motive)
6-9
Opportunity
An opportunity is an open door for solving
the unshareable problem by violating a
trust.
Weak internal controls
Circumvention of internal controls
The greater the position, the greater the trust
and exposure to unprotected assets.
6-10
Rationalization
When people do things that are contrary to their personal
beliefs outside their normal behavior they provide an
argument to make the action seem like it is in line with
their moral and ethical beliefs.
Some of the most frequent rationalizations are:
6-11
Fraud Prevention
A strong control environment and tone at the top
Can have a pervasive effect on fraud prevention
6-12
Be Aware of Exceptions
o
o
o
o
o
o
o
Missing documents.
Alterations on documents.
Photocopied documents.
Second endorsements on checks.
Unusual endorsements.
Old outstanding checks.
Unexplained adjustments to
accounts receivable and
inventory balances.
o Unusual patterns in deposits in
transit.
o General ledgers that do not
balance.
6-13
6-14
6-15
INFORMATION PROCESSING
Voucher packet (Purchase requisition, purchase order, receiving report, invoice) matched
prior to cash disbursement authorization
Deposits reconciled to amounts credited to accounts receivable ledger
Bank reconciliation
SEGREGATION OF DUTIES
Separate custody, authorization, recording, execution
PERFORMANCE REVIEWS
RECONCILIATIONS
6-17
6-18
6-19
6-20
Exhibit 6.5
How to Read a
Cancelled Check
and Endorsement
6-21
Exhibit 6.6
Small Business
Bank Statement
6-22
Audit of Cash
The first procedure in an audit of cash is to obtain a bank reconciliation
for each cash account and audit them in the following manner:
Add deposits-in-transit
Inspect bank credit/debit memo and audit for reasonableness. Examine relevant supporting
documentation.
6-23
Exhibit 6.7
Bank
Reconciliation
6-24
6-25
Exhibit 6.8
Bank
Confirmation
6-26
Check Kiting
Is the deliberate floating of funds between two or
more bank accounts to make it appear that more
cash is present and available than is really the
case. This practice is also known as playing the
float.
Advances in technology and bank scrutiny has
decreased this possibility in recent years.
A Schedule of Interbank Transfers is generally
used by auditors to detect check kiting.
6-27
Proof of Cash
A proof of cash would be used in situations where
controls over cash are weak.
It essentially combines two bank reconciliations,
reconciling all transactions that occurred during the
period to the clients Cash Receipts Journal and Cash
Disbursements Journal.
6-28
Exhibit 6.9
Illustration of Proof of CashFirst National Bank
6-29
6-30