1. Corruption
Employee Fraud and the
Audit of Cash

2. Learning Objectives
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.

3. Employee Fraud Overview
Fraud consists of knowingly making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act upon it and thus, suffer a loss or damage.
Employee fraud is the use of fraudulent means to take money or other property from an employer. It consists of three phases: (1) the fraudulent act, (2) the conversion of the money or property to the fraudster's use and (3) the cover-up.
Embezzlement is a type of fraud involving employees' or nonemployees' wrongfully taking money or property entrusted to their care, custody, and control, often accompanied by false accounting entries and other forms of lying and cover-up.
Errors are unintentional misstatements or omissions of amounts or disclosures in financial statements.
Direct-effect Illegal Acts are violations or government regulations by the company, or its management or employees that produce direct and material effects on dollar amounts in the financial statements.

4. The Fraud Triangle
There are three conditions that are likely to be present when a fraud occurs. They are:
Motivation
Opportunity
Rationalization

5. 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. 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.

7. 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:
I need it more than the other person.
I’m borrowing the money and will pay it back.
Everybody does it.
The company is big and will never miss it.
Nobody will get hurt.
I am underpaid, so this is due compensation
I need to maintain a lifestyle and image.

8. Fraud Prevention A strong control environment and tone at the top
Can have a pervasive effect on fraud prevention
Managing people pressures in the workplace
Counseling services
Anonymous hotlines
Ethics officers
Internal control activities and employee monitoring
Segregation of duties and responsibilities for transaction authorization, record keeping, custody of or access to assets, and reconciliation of actual assets to the accounting records.
Integrity by example and enforcement
Accountability
Codes of conduct
Background checks prior to hiring

9. Cash Receipts Process Receive cash and REMITTANCE ADVICE in mail.
Prepare REMITTANCE LISTING.
Enter total from REMITTANCE LISTING (or REMITTANCE ADVICE) in CASH RECEIPTS JOURNAL.
Prepare DEPOSIT SLIP and deposit cash receipts in bank (INTACT and DAILY).
Record update to SUBSIDIARY ACCOUNTS RECEIVABLE using REMITTANCE ADVICE.
Reconcile REMITTANCE LISTING, SUBSIDIARY ACCOUNTS RECEIVABLE , and DEPOSIT SLIP daily

10. Cash Receipts and Disbursements
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
PHYSICAL CONTROLS OVER THE SECURITY OF ASSETS
Deposit cash and checks daily and intact
Lock box account
EDI transactions
Dual custody over cash
Unused checks secured
Check imprinting machine

11. Cash Receipts and Disbursements
SEGREGATION OF DUTIES
Separate custody, authorization, recording, execution
PERFORMANCE REVIEWS
RECONCILIATIONS

12. Audit Evidence for Cash
Cash receipts journal
Cash disbursements journal
Bank reconciliations
Cancelled checks
Year-end bank statement
Cutoff bank statement

13. 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:
Balance per bank
CONFIRM (STANDARD BANK CONFIRMATION) directly with bank
Agree amount to CUTOFF BANK STATEMENT
Add deposits-in-transit
TRACE to cash receipts journal
VOUCH to CUTOFF BANK STATEMENT
Subtract Outstanding Checks
VOUCH to cash disbursements journal
TRACE checks cleared from cutoff bank statement

14. Audit of Cash Add/Subtract other Debit/Credit Memos
Inspect bank credit/debit memo and audit for reasonableness. Examine relevant supporting documentation.
Balance per books
FOOT the entire reconciliation for mathematical accuracy
TRACE the amount to the trial balance

15. Confirmation of Bank Balances
Standard Bank Confirmation Inquiry
Must be mailed under auditor’s own control.
Used to confirm deposit balances and loan balances
Also can be used to request information about contingent liabilities and secured transactions.
Electronic Confirmation Requests
Many banks now only complete confirmation requests electronically (e.g., confirmations.com)
Can improve the control of both delivery and receipt of the confirmation request
Allowed by professional auditing standards

16. Other Procedures for Cash
Count the petty cash twice in one day
Carefully examine endorsements on canceled checks
Audit general journal entries
Retrieve customer checks
Use marked coins and currency
Measure deposit lag time
Examine documents such as bank statements for alteration
Covert surveillance