Employee Fraud and Cash Auditing Lecture Notes

Vocabulary-style flashcards covering the definitions of fraud types, the fraud triangle, key cash assertions, and audit procedures for detecting employee fraud.

Fraud

The act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act upon it, resulting in loss or damage.

Management fraud

An intentional deception orchestrated by management designed to injure investors and creditors by providing materially misleading information.

Employee fraud

The use of fraudulent means to take money or other property from an employer, consisting 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

A type of fraud where employees or nonemployees wrongfully take money or property entrusted to their care, custody, and control, often involving false accounting entries.

Errors

Unintentional misstatements or omissions of amounts or disclosures in financial statements.

Direct-effect Illegal Acts

Violations of government regulations by a company, management, or employees that produce direct and material effects on dollar amounts in the financial statements.

The Fraud Triangle

The three conditions likely to be present when a fraud occurs: Incentive/Pressure, Opportunity, and Attitude/Rationalization.

Economic motive

A type of incentive or pressure involving an actual or perceived need for money.

Psychotic motive

A motive characterized by a "habitual criminal" who steals for the sake of stealing.

Egocentric motive

Committing fraud for the purpose of achieving personal prestige.

Ideological motive

A motive where the fraudster believes their cause is morally superior and they are justified in making others victims.

Opportunity

An open door for solving an unshareable problem by violating a trust, often caused by weak or circumvented internal controls.

Attitude/Rationalization

The argument fraudsters use to make their actions seem in line with their moral and ethical beliefs when performing behavior contrary to their normal standards.

Segregation of duties

An internal control activity involving the separation of transaction authorization, record keeping, custody of assets, and reconciliation.

Fidelity bonds

An internal control activity used to mitigate the risk of employee theft of cash.

Lockbox arrangement

A control activity where customer payments are sent directly to a bank-controlled post office box to prevent employee theft of cash receipts.

Existence (Cash Assertion)

The relevant assertion concerned with whether the cash balance actually exists in the company's bank accounts.

Valuation (Cash Assertion)

The relevant assertion concerned with whether cash balances held in foreign countries have been translated properly using appropriate spot rates.

Presentation and disclosure (Cash Assertion)

The relevant assertion concerned with ensuring that all legal restrictions on the cash balance have been properly disclosed in the footnotes.

Cutoff bank statement

Audit evidence used to verify the reconciling items on the bank reconciliation by tracing them to bank activity in the period following year-end.

Check Kiting

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.

Schedule of Interbank Transfers

An audit procedure and document generally used by auditors to detect check kiting.

Proof of Cash

An extended audit procedure used when controls over cash are weak; it reconciles all transactions that occurred during a period to the client's cash journals.

Standard Bank Confirmation Inquiry

A request for information about deposit balances, loan balances, and contingent liabilities that must be mailed under the auditor's own control.