Kế toán, kiểm toán - Chapter 06: Employee fraud and the audit of cash

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.Chapter 06Employee Fraud and theAudit of Cash"Rather fail with honor than succeed by fraud."--Sophocles (496-406 BC)6-2Learning ObjectivesDefine and explain the differences among several kinds of employee fraud that might occur at an audit client.Identify and explain the three conditions (i.e., the fraud triangle) that often exist when a fraud occurs.Describe techniques that can be used to prevent employee fraud.Describe the control activities over the receipt and disbursement of cash.Describe the types of substantive procedures that are conducted during the audit of cash.Discuss actual cash fraud cases and describe how the schemes were uncovered.Describe some extended procedures for detecting employee fraud schemes involving cash.6-3Employee Fraud OverviewFraud consists of knowingly making material misrepresentations of fact with the intent of inducing someone to believe the falsehood and act upon it and thus, suffer a loss or damage. 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.Errors are unintentional misstatements or omissions of amounts or disclosures in financial statements.Direct-effect Illegal Acts are 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.6-4The Fraud TriangleThere are three conditions that are likely to be present when a fraud occurs. They are: MotivationOpportunityRationalization6-5MotivationA motive is some kind of pressure a person experiences and believes to be unshareable with friends and confidantsActual or perceived need for money (Economic motive)“Habitual criminal” who steals for the sake of stealing (Psychotic motive) Committing fraud for personal prestige (Egocentric motive)Cause is morally superior, justified in making others victims (Ideological motive)6-6OpportunityAn opportunity is an open door for solving the unshareable problem by violating a trust.Weak internal controlsCircumvention of internal controlsThe greater the position, the greater the trust and exposure to unprotected assets.6-7RationalizationWhen people do things that are contrary to their personal beliefs – outside their normal behavior – 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 compensationI need to maintain a lifestyle and image.6-8Fraud PreventionA strong control environment and tone at the topCan have a pervasive effect on fraud preventionManaging people pressures in the workplaceCounseling servicesAnonymous hotlinesEthics officersInternal control activities and employee monitoringSegregation of duties and responsibilities for transaction authorization, record keeping, custody of or access to assets, and reconciliation of actual assets to the accounting records. Integrity by example and enforcementAccountability Codes of conductBackground checks prior to hiring6-9Cash Receipts: Process activitiesReceive 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 daily6-10Cash Receipts and Disbursements:Key Control ActivitiesINFORMATION PROCESSINGVoucher packet (Purchase requisition, purchase order, receiving report, invoice) matched prior to cash disbursement authorizationDeposits reconciled to amounts credited to accounts receivable ledger Bank reconciliationPHYSICAL CONTROLS OVER THE SECURITY OF ASSETSDeposit cash and checks daily and intactLock box account EDI transactionsDual custody over cashUnused checks securedCheck imprinting machineSEGREGATION OF DUTIESSeparate custody, authorization, recording, executionPERFORMANCE REVIEWSRECONCILIATIONS6-11Audit Evidence Used to Test CashCash receipts journalCash disbursements journalBank reconciliationsCancelled checksYear-end bank statementCutoff bank statement6-12Audit of CashThe first procedure in an audit of cash is to obtain a bank reconciliation for each cash account and audit them in the following manner:Balance per bankCONFIRM (STANDARD BANK CONFIRMATION) directly with bank Agree amount to CUTOFF BANK STATEMENT Add deposits-in-transitTRACE to cash receipts journal VOUCH to CUTOFF BANK STATEMENT Subtract Outstanding ChecksVOUCH to cash disbursements journal TRACE checks cleared from cutoff bank statement Add/Subtract other Debit/Credit MemosInspect bank credit/debit memo and audit for reasonableness. Examine relevant supporting documentation. Balance per booksFOOT the entire reconciliation for mathematical accuracyTRACE the amount to the trial balance6-13Confirmation of Bank BalancesStandard Bank Confirmation InquiryMust be mailed under auditor’s own control.Used to confirm deposit balances and loan balancesAlso can be used to request information about contingent liabilities and secured transactions.Electronic Confirmation RequestsMany banks now only complete confirmation requests electronically (e.g., confirmations.com)Can improve the control of both delivery and receipt of the confirmation requestAllowed by professional auditing standards6-14Other Fraud Detection Procedures for CashCount the petty cash twice in one dayCarefully examine endorsements on canceled checksAudit general journal entriesRetrieve customer checksUse marked coins and currencyMeasure deposit lag timeExamine documents such as bank statements for alterationCovert surveillance6-15