Chapter 11
Cash Receipt Schemes and
Other Asset Misappropriations
A Case of Taking from the Poor
to Give to the Rich
• Non-profit organization for families of 9/11 victims
• Anonymous tip alerted Board of Directors of misappropriation
of funds
• Corporate officers were using organization’s income for
personal use
• Inconsistent records with vendors
• Two sets of financial records
• Some transactions didn’t appear in original journals and ledgers
• Unauthorized personal expenditures on credit
Critical Thinking Exercises
Far off in the woods, there is a cabin. The
cabin contains 3 people. Two are in one room;
the other is alone in another room. All doors
to the cabin are locked tight and have not
been opened. All three people are dead.
There was no sign of violence in this cabin.
How did they die?
Skimming Schemes
• Theft of cash from a victim entity prior to its entry in an
accounting system
• “Off-book” fraud
• No direct audit trail
• Can occur at any point where funds enter a business
• Subdivided based on whether they target Sales or Receivables
Sales Skimming
• Most basic skimming scheme
• Collect customer payment at point of sale and make
no record of transaction
• Cash register manipulation
• After-hours sales
• Skimming by off-site employees
• Poor collection procedures
• Understated sales
• Check-for-currency substitutions
• Theft in the mail room – incoming checks
Preventing and Detecting
Sales Skimming
• Viable oversight presence when cash enters
organization
– Management
– Video cameras
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Customer complaints and tips
Cash register log-in and log-out times
Activity logs for off-site personnel
Reduce perceived opportunity to steal
Receivables Skimming
• More difficult than skimming sales
• Receivable payments aren’t logged into
accounting system
• Lapping
• Force balancing
• Stolen statements
• Fraudulent write-offs or discounts
• Debiting the wrong account
• Destroying or altering records of the transaction
Preventing and Detecting
Receivables Skimming
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Strong internal controls
Separation of duties
Regularly rotate job duties
Make employees take yearly vacation
Supervisory approval for write-offs or
discounts
• Properly trained audit staff
• Automated tests
• Trend analysis on aging of customer accounts
Proactive Computer Audit Tests
to Detect Skimming
See details in chapter
Cash Larceny Schemes
• Intentional taking away of an employer’s cash
without consent and against will of employer
• Money has already appeared on victim’s books
• Can take place whenever employee has access to
cash
• Most larceny schemes involve the theft of cash
– At point of sale
– From incoming receivables
– From the victim organization’s bank deposits
Larceny at the Point of Sale
• Large percentage of cash larceny schemes
occur at point of sale
• That’s where the money is
• Thefts from other registers
• Death by a thousand cuts
• Reversing transactions
• Altering cash counts or cash register tape
• Destroying register tapes
Preventing and Detecting
Cash Larceny at the Point of Sale
• Strong internal controls
• Segregation of duties
• Discrepancies between sales records and cash on
hand
• Reports of discounts, returns, adjustments, and
other concealing transactions
Larceny of Receivables
• Steal customer’s incoming payments
• Hide imbalances cause by the fraud
• Force balancing
• Reversing entries
• Destruction of records
Cash Larceny from the Deposit
• Taking money prior to depositing it
• Difficult to conceal
• Deposit lapping
• Deposits in transit
Preventing and Detecting
Cash Larceny from the Deposit
• Separating duties
• Itemized deposit slip
• Compare authenticated deposit slip to
organization’s copy of deposit slip, remittance
list, and general ledger posting
• Deliver 2 copies of bank statement to different
people in organization
Proactive Computer Audit Tests
Detecting Cash Larceny
See details in chapter
Noncash Misappropriation Schemes
• Misappropriation of inventory, supplies,
equipment, and other noncash assets
• Noncash misappropriations fall into the
following categories
– Misuse
– Unconcealed larceny
– Asset requisitions and transfers
– Purchasing and receiving schemes
– Fraudulent shipments
Misuse of Noncash Assets
• Two ways to misappropriate a company asset
– Misuse
– Steal
• Unauthorized use of a company asset with
false statement
• Use of office equipment to do personal work
on company time
• The costs of inventory misuse
Unconcealed Larceny Schemes
• Employee takes property from the company
premises without attempting to conceal it in
the books and records
• Take company assets without trying to justify
their absence
• Most noncash larceny schemes are committed
by employees with access to inventory
• “Management vs labor” mentality
• The fake sale
Preventing and Detecting
Larceny of Noncash Assets
• Segregation of duties
– Requisitioning
– Purchasing
– Receiving
• Physical controls
– Merchandise should be guarded and locked
– Restrict access to authorized personnel
• Installation of security cameras
• Physical inventory counts on a periodic basis
• Mechanism for receiving customer complaints
Asset Requisitions and Transfers
• Use of internal documents to gain access to
merchandise
• Move noncash assets from one location to
another
• Overstate supplies or equipment for project
and pilfer excess
• Falsify forms and remove noncash assets from
warehouse or stockroom
Purchasing and Receiving Schemes
• Purchasing and receiving functions are used to
facilitate theft of noncash assets
• False billings
– Purchase merchandise that company doesn’t need
• Noncash misappropriations
– Intentionally purchased but misappropriated by
the fraudster
• Falsifying incoming shipments
False Shipments of Inventory
and Other Assets
• Fraudster creates false shipping and sales
documents to make it appear that inventory
was sold not stolen
• No risk of being caught stealing on site
• Victim company unknowingly delivers
targeted assets
• Understate legitimate sales so accomplice is
billed for less
Other Schemes
• Employees tailor their thefts to the
organization
– Security systems
– Record-keeping systems
– Building layout
– Day-to-day operations
• Write off assets to make them available for
theft
Concealing Inventory Shrinkage
• Unaccounted-for reduction in inventory
• Shrinkage is one of the red flags that signal
fraud
– “Where did inventory go?”
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Altered inventory records
Fictitious sales and accounts receivables
Write off inventory and other assets
Physical padding
Altered inventory records
• Change the perpetual inventory record so that
it will match the physical inventory count
(a.k.a “forced reconciliation”)
• Result: appearance that no shortage exists
Fictitious sales
and accounts receivable
• Create fake sales to mask the theft of assets
• Debit accounts receivable (cash)
Credit sales account
• Issues created: Uncollectible accounts receivable (or
missing cash)
• Solution:
– “Sell” to a large client who may not notice and will
pay for the fake sale
– Write-off the receivable after an appropriate
period of time
Write-off inventory
and other assets
• Write off inventory as “obsolete”
• Result: Remove assets from the books before
or after they are stolen – no shortage
Physical padding
• Make it appear that there are more assets
present
• Example:
– Empty boxes in warehouse
– Set up a “wall” of product where nothing behind
the wall exists
Preventing and Detecting Noncash Thefts
That are Concealed by Fraudulent Support
• Separate duties of ordering goods, receiving
goods, maintaining perpetual inventory
records, and issuing payments
• Match invoices to receiving reports before
payments are issued
• Match packing slip to purchase order to
prevent
• Monitor increases in bad debts expense
Preventing and Detecting Noncash Thefts
That are Concealed by Fraudulent Support
(Continued)
• Reductions to perpetual inventory should be
properly supported
• Reconcile materials ordered for projects to the
actual work done
• Periodically perform trend analysis on
inventory designated as scrap
• Only remove assets with proper authority
Proactive Computer Audit Tests for
Detecting Noncash Misappropriations
See details in chapter