Fraud Test 3

Skimming Definition

a theft of cash from the victim prior to its entry into an accounting system

• No direct audit trail because the journal entry isn’t getting made

• It is off books

• Overview

  • Employee makes a sale of and collects payment, and makes no record of the transaction

  • Employee pockets the proceeds of the sale

  • Without a record of the sale, there is no audit trail

main types of skimming

• recieables

• sales

Sales Skimming

employee steals incoming funds before tehy are recorded

• there is no receipt

• there is no register tape or JE

• could be totally omitted or just understated

Sales Skimming Techinques

• Unrecorded Sales

  • Cash register manipulation: “no sale” or other noncash transaction is recorded

    • Cash registers are rigged so sales are not recorded on the register tapes

    • No receipt is issued

  • After-hour sales

    • Sales are conducted during non-business hours without the knowledge of the owners

  • Skimming by off-site employees

    • Inprependent sales person

    • Employees at remote locations/branches away from the primary business 

• Understated sales

  • Cash register manipulation

    • The sale is recorded for an amount lower than what was collected

    • The price or quantity of sales items is reduced

    • JE actually recorded 

• Theft of Checks

  • Mail room

    • Incoming checks are stolen and cashed

    • The customer’s account is not posted

    • This is easier to catch, though, because the customer will be mad

Sales skimming preventino and detection

• Maintain a variable oversight presence at any point

• Install video cameras

• Eliminate potential hiding places for stolen money

• Incoming mail should be opened in a clear, open area free from supervisory presence

• All cash registers record the login and logout times of each user

• Off-site personnel should maintain/review activity logscustomer will be mad

Receivables Skimming types nad prevention adn detection

• Customers are notified when payment is not received and will most likely complain. So the fraudster must conceal

Little Frogs Swim Fast During Day

• 6 types: 

  • Lapping

    • Crediting one customer’s account with payment received from another customer 

    • Keeping track of payments becomes complicated

    • The second set of books is sometimes kept

  • Force Balancing

    • Posting to the customer’s account without depositing the chek, creates an imbalance condition

    • Cash account is overstated sot eh amount skimmed must be force to balance the account 

  • Stolen Statements

    • Employee steals/alters the account statement or produces counterfeit

    • May change the customer’s address so they don’t get any memos

  • Fraudulent write offs or discounts

    • Write off bad debt

    • Post entries to contra revenues such as a discount or AFDA

  • Debiting the wrong account

    • Debiting an existing or fictitious receivable or other account(PPE)

  • Document destruction

    • Often, a last-ditch effort to destroy or manipulate accounting records 

• Prevention and detection

  • Perform a trend analysis on again of customer accounts again

  • Consider segregation of duties and oversight in an organization

    • Mandate vacations

    • Manage supervisory actions

    • Train audit staff

  • Incorrect answer: Do not check the register tape

difference between skimming and larcney

Larceny is after cash is debited

3 types of larceny

• Conceal Larceny @ POS

• Conceal Larceny of receivables

• Cash larceny from the deposit

• Concealed Larceny @ POS techinques

results in an imbalance between the register tape and cash, so it must be concealed

1. theft from other registers(using another cashier's register or access code)

2. death by a thousand cuts(Stealing small amounts over an extended period)

3. reversing transactions

4. altering cash counts or cash register tapes

5. destroying register tapes

Olivia thinks Ronald acts dumb

Concealed larcney of recievables techinques

1. Force Balancing

2. Reversing Entries

3. Destruction of Records

• Cash larceny from the deposit techinques

1. Deposit Lapping

2. Deposit’s in transit

Register disbursement two types and description

• False Refunds

  • A refund is processed when a customer returns an item of merchandise purchased from the store

  • Merchandise is placed back into inventory

  • Purchase price is returned to the customer 

  • Techniques: 

    • Whether fictitious or overstated, inventory will be overstated

    • Credit card sales vs cash refund, refund having to go to the OG payment option

    • Same imbalance as skimming, thus similar concealment considerations

• False Voids

  • Generates a disbursement from the register

  • A copy of the customer’s receipt should be attached to the void slip

  • Techniques

    • Manager(approval power) commits fraud

    • Rubber stamp approvals allow the fraud(lazy about the approval system)

    • Management and employees may conspire

      • Same imbalance as skimming, thus similar concealment considerations

journal entry associated with register disbursements

Sales Return

Cash

Invenotry

COGS

Register Disbursment prevent and detect

• Prevention and detection

  • SoD

  • Management approval should be required for all refunds and voided sales

  • Prohibit cashiers from reversing their own sales

  • Require proper documentation for voided transactions such as teh original receipt

  • Periodically generate reports of all reversing transactions

  • Look for large numbers of transactions just below the approval amount

  • Randomly call customers who have returned merchandise or voided sales

3 types of billing schemes

and description

Three types: Shell Company, Non-accomplice vendor, and personal purchases 

Billing schemes: a perpetrator uses false documentation (an invoice) to cause a payment to be issued for a fraudulent purpose - fraudulent disbursement in the same maner as a legitimate disbursement

shell company tehicnques, prevent and detect and cherstistics

• Techniques

1. Creating a bank account is usually set up in the company’s name

2. From the company, considering: 

• Certificate of information or assumed-name certificate set up

• Someone else’s name, fictitious name, or actual name

• Home address, PO box, or friend/relative’s address 

3. Paying the company

• Submitting false invoices

• Self-approval of fraudulent invoices: most fraudsters can approve payment(or may forge) 

• “Rubber Stamp” supervoros: approve without reviewing the document

• Reliance on other false documents: fraudsters may submit false documents to initiate an invoice(PO, invoice, and receiving report)

• Prevent and detect: 

  • Maintain and regularly update an approved vendor list

  • Independently verify all vendors before payment

  • Identifying shell company invoices

    • Lack of detail on teh fraudulent invoice

    • Mailing address my be an indicator of fraud

    • Consecutively numbered invoices over a period of time

    • Reviewing payables and sorting payments by vendor

  • Testing for shell company schemes

    • Montier trends in average unit prices

    • Investigate goods and services that would not be normally purchased

    • Compare the vendor address to the employee addresses

  • Key is lack of approved vendor list

  • Verifying whether a shell exists

    • Use internet to identify the vendor 

    • Contact others in the industry

  • Identifying the employee behind a shell company

    • Conduct a public records search of teh company’s registration

    • Match vendor payments with payroll checks 

• Idenitfy/chraretsitcs

  • Lack of detail on teh fraudulent invoice

  • Mailing address may be an indicator of fraud

  • Consecutively numbered invoices over a period of time

  • Reviewing payables and sorting payments by vendor and invoice number

Nonaccomplice vendor(prevent and detect and tehicnques)

• Non-accomplice vendors

  • Techniques

    • Vendor is not a part of the scheme

    • Pay and return schemes: mishandle a payment to a legitimate vendor 

      • Double pay an invoice

      • Pay the wrong vendor

      • Overpay the invoice amount

    • Purchase excess merchandise: 

    • Mishandle a payment to a legitimate vendor

    • Overbilling with a non-accomplice vendor’s invoices:

      • A fake invoice is created for a legitimate vendor

      • Rerun an invoice already paid

  • Prevent and detect

    • Incoming checks should be scanned and attached to teh remittance advice

    • Regarding overpayments, banks should be instructed not to cash checks payable to the organization

• Personal purchases prevent and deteict and techinque

• Personal purchases

  • Techniques: 

    • Employees make personal purchases for themselves, their business, their family, or their friends using company money 

    • Perpetrator causes teh victim to order and pay for an unneeded asset

    • False invoices: 

      • Fraudster is the authorizer of invoices

      • False purchase requisitions

        • Misrepresent the nature of the purchase

        • Change the delivery address of the purchase

      • Falsifying other documents, such as purchase orders, to obtain authorization

    • Company card - like you are in charge of buying things on behalf of the company 

      • Employees make purchases using their company credit cards, purchasing cards, or running accounts with vendors

      • Employees order items using an existing account with the vendor

      • Employee purchases a good or service, receives reimbursement and then returns the item for credit 

  • Prevent and detect

    • Conduct a thorough review of each credit card or purchasing card statement

    • Only original support for the reimbursement should be allowed

    • Fraudster often works through purchases

payroll schemes and the 4 types

Four types: ghost employee, commission, falsified wages(don’t care about teh fourth)  

• Occupational fraud in which a person who works for an organization that causes that organization to issue a payment for hours not worked

ghost employee steps

• Ghost employees: putting someone on the payroll who doesn’t work for the victim company. Four steps:  

  • 1. Adding the ghost to the payroll

    • Through the personnel/HR/payroll department

    • Using names like real employees

    • Failing to remove terminated employees from the payroll

  • 2. Collecting timekeeping information

    • Fake timecards

    • Approval of time cards

    • Computarized timekeeping systems

    • Salaried vs hourly workers

  • 3. Issuing the paycheck

  • 4. Delivering the paycheck

    • Where does it go? 

    • Hand delivered

    • Mailed to teh employees address

    • Direct deposited 

  • Preventing and detecting

    • Separate teh hiring function from teh payroll function

    • Personnel records should be independently maintained form payroll and timekeeping functions

    • The personnel department should verify any changes to payroll

faslfied hours tehcinques and prevent and detecting

• Faslfied hours/salary 

  • Techniques: 

    • Overpayment of wages is the most common form of misappropriating of payroll funds

    • Increase the number of hours or pay(time clocks, computer tracking, manually prepared timesheets) 

  • Prevent and detect

    • Preparation, authorization, distribution, and reconciliation should be segregated

    • A designated

    • Missed the PD too

commissinos prevent and detect and tehciques

• Commissions

  • Pay is based on employees' output rather than hours worked or set salary

  • Falsify the amount of sales made: 

    • Create fraudulent sales orders, customer purchase orders, credit authorizations, packing slips, invoices, etc

    • Ring up a  false sale on the cash register

    • Overstate legitimate sales

  • Fraudulently increase the rate of commission 

  • Prevent and detect

    • Run periodic reports to show an unusual relationship between sales figures and commission figures

    • Run reports that compare commissions earned and uncollected sales among salespersons

    • Conduct a random sample of customers to verify sales

Expense reinbursemetns types

4 types: mischaracterized expenses, overstated expenses, fictitious expenses, and multiple reimbursements

• Employees are reimbursed for expenses on behalf of their employer

  • Business purpose explained and receipts attached per the organization’s guidelines

mischaracterized expense types and tehcinques

• Mischaracterized expense: the amount/nature of the reimbursement request is misstated

  • Fraudster seeks reimbursement for personal expenses

    • Personal trips listed as business trips

    • Non-allowable meals with friends and family 

  • Techniques: 

    • Perpetrators are usually high-level employees, owners, or officers

    • Lack of detailed expense reports

  • Prevent and detect

    • Require detailed expense reports with original support documentation

    • Require direct supervisory review of all travel and entertainment expenses

    • Establish a policy that clearly states what will adn will not be reimbursed

    • Compare dates, prior year expenses, and the nature of expenses

• Overstated expenses types and tehicnques

• Overstated expenses: the amount of the reimbursement request is overstated

  • Techniques: 

    • Altered receipts

    • Overpurchasing

    • Overstating another employee’s expenses

  • Prevent and detect

    • Require detailed expense reports with original support documentation

    • Book travel through the company travel agent using the designated company credit card

    • Compare dates and the nature of expenses 

Fictitious expenses: tehciques and preventing and detecting

• Fictitious expenses: producing fictitious receipts 

  • Techniques

    • Create on computer

    • Obtaining blank receipts from vendors

    • Claiming the expenses of others

  • Prevent and detect

    • High dollar items paid in cash

    • Expenses that are cosnsistenly rounded off, ending with 0 or 5

    • Expenses that are cosnistently for the same amount or constantly just below reimbursement limit

    • Missed one

mupltple expenses techinques and prevent and detect

• Mulptle: a single expense is submitted several times

  • Techniques submit teh credit card receipt for the items charges to teh company’s credit card account

  • Submitting teh same expenses to differrernt

  • This only if it is 2 veriosus of our receipt twice by us

    • If on the taxi ride somewhere you submit that twice that is muptlle

    • If you share a cab with someone and you both submit it then it is fictiousis expense

• Missed a lot in prevent and detect

Check Tampering

5 types: forged maker, forged endorsement, altered payee, concealed checks, authorized maker 

Occurs when an employee converts an organization’s funds by either

• Fraudulently preparing a check drawn

• Or Intercept and convert a check that has already been prepared 

• Perpetrator prepares a fraudulent check. Depends on the ability to: 

  • Access blank checms

  • Access bank statements

  • Access the cash disbursements journal

  • Forge a signature or alter information on the check

Forged maker

• Forged maker: an employee misappropriates a blank check and fraudulently affixes the signature of an authorized maker(the person who signs)

  • Fraudster must have: 

    • Access to a blank check

      • Employee has access

      • Checkers poorly guarded

      • Counterfeit checks

    • Convincing forgery of an authroized signature

      • Could: free hand, photocopy, or e signature

    • Ability to conceal fraud 

      • Miscode the check

      • use of fake id 

      • payable to “cash”

  • Prevent and detect

    • Safeguard access to blank chemcs adn signature statmps

    • Establish rules for custody of checms that have been prepared but not signed

    • Separate duties of chekc preparer adn check signers

    • Rotate authroized check signers when possible and keep track of authorized signers

• Forged Endorsement:

• Forged Endorsement: employee intercepts a company check intededn for a third pary

  • Fraudster must have: 

    • Ability to intercept a check: 

      • Employee involved in teh delivery of checks

      • Theft of checks, return checks or reroutign teh delivery of checks

    • Ability to convert the stolen checks

  • Prevent and detect: 

    • Separate the functions of cutting checks, check signing, and delivery of chekcs

    • Investigate Vendor complaints

    • Accounting system shold idenitfy duplicate payments

• Altered Payee

• Altered Payee: employee intercepts a company chekc intended for a third party

  • Payee designation is altered so the check can be converted

  • Fraudter must have

    • Ability to alter payee of a check already prepared by someone else: 

      • A false payee’s name is inserted in the place of a true payee’s name

      • Ap system is manipulated ot change the payee name

      • Tacking on by adding letts

      • Or

        • Ability to trick teh suthotirzed maker into signing a chekc with: 

        • Erasable ink

        • Blank checks already signed

  • Prevent and detect

    • Separation of duties in teh check writing process

    • SoD of the check reconillatin process(check preparation, and check reconciliation)

• Concealed checks:

• Concealed checks: employee prepares a fraudulent check and submits it along with legitimate checks

  • Check is payable to the employee, an accomplice, a fictitious person or a fictitious business

  • Occurs when checks are signed iwthout proper review or reviewer is busy

  • Fraudster must have

    • Ability to make the check payable to the employee, an accomplic, or a fake person or business

    • Missed one

  • Missed prevent and detect

Authorized maker

• Authroized maker: employees with signature authority prepares a fraudulent check

  • Ovverring controls through intimation

  • Fraudsetr must have

    • Ability to override conolts

      • Intimatidation

      • Lack of SoD

      • Failure to closely monitor accounts

  • Prevent and detect

    • SoS in check writing process

    • Require signature for disbursements over certain amount

    • Maintain an up to date vendor list and confirm all disburmesnet, scurtiunicing vendors not on the list

• Concealing

  • Forged endorsement and altered payee create a problem because the legiatme recipeat will complain

  • Bank statement reconciliation considerations: 

    • Remove fraudulent hcekc

    • Doctor the bank statement

    • Code check as void

  • Disbursement journal considerations

  • Reissuing intencepted checks

  • Bogus fake documents

• Electronic payments: alternative to paper checks, enable payer to transmit funds electronic over internet

  • Include ACH pyamets, online bill payments and wire transcfers

  • Fraudster may able to 

    • Abuse legitimate access to employer’s payment system

    • Gain access through social engineering or password theft

    • Exploit weakness in IC or payment setem

  • Prevent and detect missed

5 types of check tampering

5 types: forged maker, forged endorsement, altered payee, concealed checks, authorized maker 

5 types of noncash assets

5 types: Misuse, concealed larceny, fraudulent sales/shipments, asset requisitions and transfers, purchasing and receiving schemes

Non cash asset misues

• MIsues

  • Assets may be misused

  • Time may be misused(using work time for other things)

  • Cost of misuse: 

    • Loss of productivity

    • Need to hire additional employees to compensate

    • Lost business if employee’s business competes

    • Unauthorized use of equipment can mean additional deprecation

Noncash unconcealed larceny

• Unconcealed larceny

  • Fraudster simply takes the asset

  • Greater concern than misuse of assets

  • Employees may be aware be refrain from reporting

  • Techinques: 

    • Many of teh employees who steal company property are highly trusted

    • Asset misapproraited after hours or mailed to perpetrator

Noncash fake sale/shipment

• Fake sale/shipment

  • Sale is not rung up, but the accomplice takes the merchandise

  • Acocmplice may return teh merchandise for cash

  • Techniques: 

    • False or inflated shipping sales documents are created to make it appear that the inventory was sold

    • False packing slips can allow the inventory to be delivered to fraudster or accomlce

    • Correcpanoding receivable is written off

Noncash asset requistion/transfers

• Asset Requistion/transfers

  • Documentation enables non-cash assets to be moved from one location to another

  • Techniques:

    • Internal documents can be used to fraudlety gain access to the merchandise

    • I missed some

Noncash purchasing/receiving

• Purchasing/receiving

  • Assets were intentionally purchased by the company but missapproarited

  • Techniques: 

    • Falsifying incoming shipments

    • May reject portion of the shipment as be substandard

• Concealing: 

  • Assets are written off to make them available for theft

  • New equipment is ordered for teh company to replace old. New equipment is sent to the employee’s home, leaving old equipment in place

  • Assets are declared as scrap and given to the employee

  • Consider altering records for  teh fictitious sales and AR

  • Aletnerted inventory records by forced reconciliation or coverering up the correct totals

  • Consider inventory shrinktage and physical counting of inventory: 

    • Write off inventory and other assets(elimates the problem of shrinkage)

    • Physical padding(make it appear that there are more assets present than there actually are)

Prevent and detect noncash

• Prevent and detect

  • SoD:

    • Ordering

    • Reciebiing

    • Maintain records

    • Issuing payments

  • Match teh invoices to rr before payments are issued

  • Match the packing slip to an approved PO

  • Match outgoing shipments to sales orders before merchandise goes out

  • Check out unexplained increases in BDE

  • Compare shipping addresses to employee addresses review unexplained entries in perpetual inventory records

  • Perform trend analysis in scrap inventory

  • Check to

• Intanigable assets

• Intanigable assets

  • Missapporairting of information

    • Competitively sensitive information(customer lists, marketing strarges)

    • Can undermine value, reputation, and competitive advantage

    • Can result in legal liability

    • Identify most valuable infromatoin and take steps to prtct it 

  • Missparoration of securities

    • Proper IC over investment portfolio