Chapter 6: Employee Fraud & Audit of Cash

fraud

• material misrepresentation of fact

• intent that someone acted on falsehood

• incur a loss/damage

misappropriation of assets

• fraudulent act

• conversion of assets to cash

• cover up the fraudulent act

potential employee red flags that are easy for auditors to observe:

• experience sleeplessness

• drinks too much

• takes drugs

• easily irritable

• can’t relax

• gets defensive, argumentative

• can’t look people in the eye

• sweats excessively

• goes to confession

• finds excuses/scapegoats for mistakes

• works standing up

• works alone

• works late frequently

• doesn’t take vacations

the fraud triangle consists of 3 components:

• incentive/pressure

• opportunity

• attitude

fraud prevention includes:

• strong control environment

• managing pressures in the workplace

• proper segregation of duties

• controls that balance fraud prevention/detection with trust needed to run business

auditor’s awareness of exceptions when it comes to fraud prevention are:

• missing documents

• Alterations on documents.

• Photocopied documents.

• Second endorsements on checks.

• Unusual endorsements.

• Unexplained adjustments to

accounts receivable and inventory

balances.

• General ledgers that do not balance.

• Cash shortages and overages.

• Excessive voids and credit memos

Customer complaints.

• Common names or addresses for

refunds.

• Increased past due receivables.

• Inventory shortages.

• Increased scrap.

• Duplicate payments.

• Employees that cannot be found.

types of management-prepared source documents used to audit cash

• cash receipts journal

• cash disbursements journal

• bank reconciliations

• canceled checks

• bank statements

cash receipts journal

detail of deposits/debit cash entries

cash disbursements journal

detail of payments/credit cash entries

bank reconciliations

compares book cash balance to bank cash balance

canceled checks

images of cashed checks from banks

bank statements

shows cash activity for the period

there is always fraud risk in cash because it is:

liquid, transportable, not easily identifiable

control activities to prevent/detect employee fraud in cash receipts:

• dual custody of cash

• lockbox

• separation of duties

• reconciliation of deposits to customer accounts

• fidelity bonds

dual custody of cash prevents:

skimming

reconciliation of deposits to customer accounts detects:

lapping

control activities to prevent/detect employee fraud in cash disbursements:

separation of:

• custody of blank checks/documents

• authorization of payments based on supporting vouchers (dual authorization for high-dollar payments)

• recording of cash disbursements

• reconciliation

2 types of substantive tests:

• substantive analytical procedures

• test of details

the best substantive test/procedure for audits of cash is:

test of details of bank reconciliation

auditors rarely use substantive analytical procedures for audits of cash. T or F

True

steps for tests of detail over the bank reconciliation (general):

• balance per bank

• add deposits-in-transit

• subtract outstanding checks

• add/subtract other debit/credit memos

• balance per books

balance per bank means to? (test of details over bank reconciliation)

• confirm electronically directly w/bank

• agree amount to cutoff bank statement

add deposits-in-transit means to? (test of details over bank reconciliation)

• trace to cash receipts journal

• vouch to cutoff bank statement

subtracting outstanding checks includes: (test of details over bank reconciliation)

• vouch to cash disbursements journal

• trace checks cleared from cutoff bank statement

add/subtract other debit/credit memos (test of details over bank reconciliation)

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

extended procedures to detect fraud:

• schedule of interbank transfers

• proof of cash

• count and recount cash on same day

• retrieve checks from customers

• use marked currency

• measure deposit lag time

• examine documents

• inquiry

• covert surveillance

• horizontal + vertical analysis

• net worth analysis

• expenditure analysis

• reasonableness tests (of purpose of cash disbursements)

what are the significant account(s) for the cash cycle?

cash

what are the relevant assertions for the cash cycle? (highest to lowest risk)

• existence

• valuation

• presentation/disclosure