Audit Chapter #6 - Employee Fraud and the Audit of Cash

What is fraud?

Knowingly making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act upon it and thus suffer loss or damage

What is management fraud?

Intentional deception that is orchestrated by management and is designed to injure investors and creditors by providing materially misleading information.

What is employee fraud?

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

What are the three phases of employee fraud?

1. The act

2. The conversion oef the money or property to the fraudsters use

3. The cover up

What is embezzlement?

A type of fraud involving employees or non employees 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.

What are errors?

Unintentional misstatements or omissions of amounts or disclosures in financial statmeents

What are direct-effect illegal acts?

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.

True or false fraudsters are like every other person?

True

Do fraudsters typically act alone or with other people?

Alone.

What are the three conditions of the fraud triangle that are likely to be present when a fraud occurs?

1. Incentive/pressure

2. Opportunity

3. Attitude/rationalization

What is a motive in the fraud context?

Some kind of pressure a person experiences and believes to be unsharable with friends and confidants

What is an economic motive?

An actual or perceived need for money

What is a psychotic motive?

A habitual criminal who steals for the sake of stealing

What is an egocentric motive?

Committing fraud for personal prestige.

What is an ideological motive?

Cause is morally superior, justified in making others victims.

What is an opportunity in fraud?

An open door for solving the unsharable problem by violation trust.

What is attitude in the fraud triangle?

When people do things that are contrary to their personal beliefs or outside of their normal behavior they provide an argument to make it seem like it is in line with their moral and ethical beliefs.

Can a strong control environment and tone at the top have a pervasive effect on fraud prevention?

Yes

What three things should companys offer to manage people pressures in the work place?

Counseling services, anonymous hotlines, and ethics officers

What internal is the primary internal control activity that should be in place to prevent and detect fraud.

segregation of duties including authorization, record keeping, custody of assets, and reconciliation of assets to records.

What are the five management reports and data files used in an audit of cash?

1. Cash receipts journal

2. Cash disbursements journal

3. Bank reconciliations

4. Canceled checks

5. Bank statements

What is the purpose of the cash receipts journal?

Contains all of the detailed entries for all receipts of cash by the entity including cash deposits. Also contains the population of credit entries that should be reflected in the credits to accounts receivable for customer payments

What is the cash disbursements journal?

This is the company’s detailed record of entries for checks written and electronic payments made during the period being audited.

All cash disbursements other than those from a petty cash or payroll account should be made via:

Check or electronic transfer

Where are the adjusting and correcting entries that can result form the bank account reconciliation recorded?

The cash disbursements journal

What is the primary document used to test the cash balance in the financial statements?

The bank reconciliation

What is the process of receiving and recording cash receipts? There are 6 steps

1. Receive cash and remittance advice in mail

2. Prepare remittance listing

3. Enter total from remittance listing in cash receipts journal

4. Prepare deposit slip and deposit cash receipts in bank

5. Record update to subsidiary accounts receivable using remittance advice

6. Reconcile remittance listing, subsidiary accounts receivable, and deposit slip daily

What is audit risk?

The risk that auditors will issue an unmodified opinion on financial statements that contain a material misstatement

What are the most significant and relevant assertions for cash? (3) What could go wrong for each assertion?

1. Existence - bank balance may not exist in the company’s bank accounts

2. Valuation - cash balance that is held in foreign countries may not have been translated properly.

3. Presentation and disclosure - there may be restrictions on the cash balance that were not properly disclosed

What is a lockbox arrangement?

Payments are remitted by customers to an external location such as a lock box where a fiduciary opens the box on a daily basis, lists the receipts, deposits the money, and sends the remittance advice to the company.

What four controls should a company put in place because initial custody of cash by an employee can’t be avoided? Where should the cash be sent after this?

1. Have two people open the mail

2. Endorse the checks immediately after removing them from the envelope

3. Prepare a list of the cash receipts as early in the process as possible

4. Separate the actual cash from record keeping document

To the cashier or treasurer’s office where a bank deposit is prepared and the money is sent to the bank daily and intact

Where does the list of remittance advice’s go? What does this office do?

The controllers office. Records cash receipts

What is a fidelity bond?

An insurance policy that covers most kinds of cash embezzlement losses

Do auditors often use substantive analytical procedures to test cash?

No

What is a schedule of interbank transfers?

Determines whether transfers of cash form one bank to another were recorded properly

What is kiting?

The deliberate floating of funds between two or more bank accounts in order to make it appear that more cash is present than is really the case

What is proof of cash?

A reconciliation in which the bank balance, the bank report of cash deposited, and the bank report of cash paid are all reconciled to the company’s general ledger and cash receipts and disbursements journals.

What is the purpose of the proof of cash?

It attempts to reconcile the deposits and payments reported by the bank to the deposits and payments recorded in the cash receipts and disbursements journal

What is count and recount cash on the same day?

sometimes auditors will count cash one day then come back later and recount it to attempt to catch fraudsters.

What is analyze the mix of cash and checks in deposits?

A procedure most effective for retail operations in which cashiers receive significant amounts of both cash and checks. This mix should be relatively consistent over time.

Why might auditors measure deposit lag time?

People who take cash and hold the deposit for the next cash receipt to make up for the difference causes a delay between the date of recording and the bank’s date of deposit.

What is document examination?

Auditors look for erasure, alterations, and photocopies where originals should be filed.

What is inquiry?

Discussing fraud possibilities with uninvolved individuals.