1. Employee fraud and the audit of Cash
Corruption
Employee fraud and the audit of Cash

2. Presentation Overview
Overview of the fraud
Cash collections and disbursements
Audit of cash

3. 1. Fraud Overview Fraud opportunities Definitions related to fraud
The elements of fraud
Red flags: Employee fraud
Fraud prevention

4. A. Fraud opportunities

5. B. Employee Fraud Definitions;
White collar crime is fraud perpetrated by people who work in offices and steal with a pencil or a computer terminal. The contrast is violent street crime.
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.
Larceny is simple theft of an employers property that is not entrusted to an employee's care, custody or control.
Defalcation is another name for employee fraud and embezzlement.

6. C. Fraud Elements

7. 1. Motive
A motive is some kind of pressure a person experiences and believes non-sharable with friends and confidants
Psychotic: “Habitual criminal” who steals for the sake of stealing
Egocentric: Committing fraud for personal prestige
Ideological: Cause is morally superior, justified in making others victims
Economic: Desperate or perceived need for money

8. 2. Opportunity
An opportunity is an open door for solving the non-sharable 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.

9. 3. Rationalization
When people do things that are contrary to their personal beliefs – outside their normal behaviour – 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.

10. D. Red Flags: Employee Fraud

11. E. Fraud Prevention Managing people pressures in the workplace
Counselling services
Hotlines
Control procedures and employee monitoring
Integrity by example and enforcement

12. II. Cash Collections and Disbursements
Cash as the Most Susceptible Asset
The Processing of Cash Receipts
Key Control Activities Over Cash Collections and Disbursements

13. A. Most Susceptible Asset
Cash is highly liquid, easily transportable, and not easily identifiable, and therefore is a primary target for employee thieves.
Some strong internal controls:
Dual custody of cash at all times
Lockbox arrangement
Fidelity bonds

14. B. Cash Receipts 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

15. C. Key Control Activities
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
Dual custody over cash
Unused checks secured
SEGREGATION OF DUTIES

16. III. Audit of Cash Cash on Hand and on Deposit Bank Reconciliation
Standard Bank Confirmation
Check Kiting
Proof of Cash

17. A. Cash on Hand and Deposit
Count SIMULTANEOUSLY with other liquid assets
Count in presence of client employee
Receipts not deposited
Trace to cash receipts journal (CRJ)
Vouch to subsequent deposit in bank statement
2. Cash on Deposit
Audited mainly through the client’s bank reconciliation.

18. B. Bank Reconciliation Balance per bank
CONFIRM directly with bank using a standard bank confirmation
Agree 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
Add/Subtract Debit/Credit Memos
Inspect bank credit/debit memo
Balance per books
FOOT Reconciliation
TRACE to trial balance

19. B. Bank Reconciliation

20. C. Standard Bank Confirmation
In addition to corroborating cash and loan balances, a STANDARD BANK CONFIRMATION INQUIRY also requests information about contingent liabilities and secured transactions.

21. D. Check Kiting
KITING is a fraud that occurs by reporting cash simultaneously in two different bank accounts.
A Schedule of Interbank Transfers is generally useful in detecting KITING.

22. E. Proof of Cash
A PROOF OF CASH is used when controls over cash are weak.
It essentially combines two bank reconciliations, reconciling all transactions that occurred during the period to the client’s Cash Receipts Journal and Cash Disbursements Journal.

23. Summary
Fraud includes elements for motive, opportunity, and rationalization
Overview of cash receipts processing
Controls over cash in the form of bank reconciliations and bank confirmations
Check kiting and proof of cash