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«GLOBAL HEADQUARTERS • THE GREGOR BUiLDinG 716 WEST AvE • AUSTin, TX 78701-2727 • USA Cash Schemes V. CASH SCHEMES Introduction Cash is the ...»

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Cut-Off Statements Cut-off statements are bank statements that show income and expenses in a specific time period, and are often used by auditors to ensure transactions are reported in the proper period. Cut-off statements can also be used to detect unauthorized bank accounts. Additionally, cut-off statements can be used in cases where there are insufficient personnel within the organization to ensure segregation of duties. If the employees know that, at any time, a cut-off statement will be ordered and reviewed independently, the employees are less likely to perpetrate cash fraud.

A cut-off statement is generally ordered from the bank, delivered unopened to the auditor (or outsider), and reconciled. A cut-off statement can be ordered at any time during the accounting cycle; it does not have to be ordered at the end.

Another method related to the cut-off statement is the bank confirmation request. Unlike the cut-off statement, this detection method is merely a report of the balance in the account as of the date requested. When ordering cut-off statements or confirmations, be sure to request the information for all accounts in the company’s name.

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Surprise Cash Counts Sometimes, surprise cash counts can turn up situations of employees “borrowing” or floating small loans (often called swapping). It is critical that these cash counts be done on an irregular and unannounced basis. If employee checks are included in the cash drawer or register, then this could indicate that the employees are swapping checks for cash.

The Corporate Con Cash Schemes


Payday was every other Friday at the National Bank of Springsville. Mike, a new teller at the bank, did not have enough money to make his October house payment, which was due on the fifteenth of the month, a Thursday. So, on Thursday, Mike placed a check in his cash drawer for the amount of the shortfall and withdrew the cash. Mike intended to replace the check with cash the following Monday morning, after he had cashed his next paycheck. On Friday morning, the internal auditors performed a surprise cash count and took note of Mike’s personal check in his cash drawer.

As luck would have it, Mike got into a fender bender on Friday night while driving home from work.

His car had to be towed, and the service charge took the last of Mike’s cash reserves.

On the following Monday morning, Mike did not have enough cash to replace his personal check, so he replaced the old check with a new one that had a current date. Much to Mike’s surprise, the internal auditors returned on Monday afternoon for a second surprise cash count. They discovered that Mike had replaced the old check with a new one. Mike was terminated.

Customer Complaints Cash thefts are sometimes reported by customers who have either paid money on an account and have not received credit, or in some cases, when they notice that the credit they have been given does not agree with the payment they have made.

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The teller was interviewed and admitted to forging and negotiating the savings withdrawal. The teller had obtained the client’s mother’s maiden name and birth place, had fabricated a duplicate savings receipt book, and, on an unscheduled work day, went to the domiciling branch, posing as the client.

The teller did not have any identification but was persistent enough to remain in the branch for several hours to obtain an approval on the savings withdrawal. The teller who forged the withdrawal was only 17 years old.

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Altered or Missing Documents The cash register tape submitted with the cash receipts should be readable and in good condition at all times. A common method of detecting potential cash fraud is by examining the cash register tape. If it has been altered or is missing, further investigation is warranted.

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In this example, the supervisor is an integral part of the internal control, ensuring that the cashier does not manipulate the register tape by reversing entries or by mutilating the tape itself. Although the extra time might cause frustration, keep in mind that this store could be trying to avoid mutilated or altered register tapes.

Fictitious Refunds or Discounts Fictitious refunds or discounts can often be detected when closely examining the documentation submitted with the cash receipts. Another related detection method is to evaluate the discounts given by the cashier or salesperson. This analysis might point out that a single employee or group of employees has a higher incidence rate of discounts than other employees. Further examination is then necessary to determine if the discounts are appropriate and properly documented.

Additionally, if customers are asked to examine their receipts, employees are prevented from making inappropriate refunds or discounts. This method employs the customer as part of the internal control system, to ensure that the cashier or salesperson is properly accounting for the sale.


Customers can be given a simple incentive for examining their cash register receipts, such as receiving their purchases for free if the salesperson fails to give receipts. With this policy in place, both customers and employees are integral components of the internal control mechanism for assuring that the register tape and the receipts are equal. In addition, if the register tape must be submitted with the register reconciliation, the issuance of fictitious refunds or discounts can be substantially reduced.

Journal Entry Review Cash frauds can often be detected by reviewing and analyzing all journal entries made to the cash accounts. This review and analysis should be performed on a regular basis. If an employee is unable to conceal the fraud through altering the source documents, such as the cash register tape, then he might The Corporate Con Cash Schemes resort to making a journal entry directly to cash. In general, there are very few instances in which a journal entry is necessary for cash. One of these exceptions is the recording of the bank service charge.

However, this is an easy journal entry to trace to its source documentation, namely the bank statement.

Therefore, all other entries directly to cash are suspect and should be traced to their source documentation or explanation.


A cash fraud of approximately $521,000 was discovered when a computerized review of the journal entries revealed that several entries had been made to an income account, and that those entries were unusual in nature.

The employee who perpetrated this fraud had made use of general ledger journal entries to income accounts. He entered fictitious transactions that resulted in a cash increase in his own account. He was caught by means of an automated testing program.

Review and Analysis of Gross Sales and Returns and Allowances Inappropriate refunds and discounts can also be detected by analyzing the relationship between sales, cost of sales, and the returns and allowances. If a large cash fraud is suspected, a thorough review of these accounts might enlighten the auditor as to the magnitude of the suspected fraud. An analysis of refunds, returns, and allowances with the actual flow of inventory might reveal some fraud schemes. The refund should cause an entry to inventory, even if it is damaged inventory. Likewise, a return causes a corresponding entry to an inventory account. There should be a linear relationship between sales, returns, and allowances over a relevant range. Any change in this relationship could point to a fraud scheme unless there is another valid explanation, such as a change in the manufacturing process, change in product line, or a similar change.


The assistant manager in a retail store periodically removed $50 to $100 from the cash register for his own use. At the home office, the auditors discovered that the relationship among sales returns, allowances, and sales for this particular location was inconsistent with all other locations. The auditors monitored the relationship for some time. Rather than improving, the relationship became even worse.

Eventually, it was discovered that the assistant manager was recording the cash thefts as “returns and allowances.” The auditors noticed the red flag because the sales returns and allowances for this location were a larger percentage of sales than at any other location.

The Corporate Con 73 Cash Schemes Analytical Review With the aid of a computer, cash frauds might also be detected through the use of analytical reviews. For

example, searches can be designed to list the following:

• All voided checks

• Missing checks

• Checks payable to employees (except payroll)

• Deposit dates compared with posting dates of customers’ accounts

• Cash advances

• Voids and refunds by employee ID Voided Checks Voided checks might indicate that employees have embezzled cash and charged the embezzlement to expense accounts. When the expense is paid (from accounts payable), the checks are voided and removed from the mail.

Missing Checks If checks are missing, this might indicate that the control over the physical safekeeping of the checks is somewhat lax. If any checks are found to be missing, this could be a red flag of misappropriation of cash.

Checks Payable to Employees Any checks payable to employees, with the exception of regular payroll, should be examined for appropriateness. Such an examination might indicate other schemes, such as conflicts of interest, fictitious vendors, or duplicate expense reimbursements.

Deposit Dates If the dates on the deposits do not match the dates the payments are credited to the corresponding customer account, this might be a red flag of a lapping scheme (described in more detail later in this workbook).

Cash Advances An examination of all cash advances might reveal that they are not all properly documented and, therefore, inappropriate payments are made to employees. A random review of all cash advances might go a long way to deter employee abuse of an advance system.

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Voids and Refunds by Employee Identification By examining the amounts and occurrence rates of voided sales and refunds, sorted by employee ID, one might detect a pattern of unrecorded sales or fictitious refunds.

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Segregation of Duties The primary prevention to cash fraud is the segregation of duties. Whenever one individual has control over the entire accounting transaction or even multiple parts of it, the opportunity for cash fraud is

present. Each of the following duties and responsibilities should be segregated:

• Cash receipts

• Bank deposits

• Bank reconciliation

• Cash disbursements If any one person has the ability to collect the cash, deposit the receipts, record that collection, and disburse company funds, there is a high risk that fraud will occur.

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The perpetrator was employed as a teller for approximately five years before she was promoted to head cashier. The head cashier was responsible for the reconciliation of the daily cash receipts to the cash transmittal and bank deposits. The head cashier also prepared the deposits of funds received from outside departments, such as the bookstore and the dining operations. The deposits from the outside departments involved substantial amounts of cash. As head cashier, she also prepared the initial documentation that served as the input for the various general ledger accounts, including accounts receivable.

The perpetrator’s extensive knowledge and experience, coupled with the trust placed in her by the manager, resulted in a diminishing review of her work, particularly her cash register reconciliations. She soon was able to manipulate the documentation and the control procedures necessary to conceal the

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continued embezzlement of funds. The 29-year-old head cashier stole an estimated $66,000. She was fired and prosecuted, but the grand jury failed to indict her.


Karina was the sole bookkeeper in a family-owned flooring-supply store in San Diego. Because of the lack of internal control, specifically the lack of segregation of duties, Karina was able to embezzle approximately $550,000 from her employer. In her position as bookkeeper, she was responsible for writing the checks and reconciling the bank account. Her scheme was very simple—she wrote checks to herself, made notations in the check register that the checks had been voided, and then destroyed the canceled checks when they were returned with the bank statement. Karina concealed her scheme by decreasing inventory accounts in lieu of the cash accounts. The fraud was discovered when the store owner learned that a company check had bounced and began looking at the bank statements to see why there was not sufficient funds in the account to cover that payment. Karina was subsequently prosecuted, convicted, and spent eight months in prison for her crime.

Assignment Rotation and Mandatory Vacations Mandatory job rotation is an excellent method of detecting cash fraud. To sustain a fraud, one must continually conceal it. By establishing a mandatory job or assignment rotation, the concealment element is interrupted. If mandatory vacations are within the company’s policies, it is also important to remember that during the employee’s absence, the normal workload of that employee should be performed by another individual. The purpose of mandatory vacation is lost if the work is allowed to remain undone during the employee’s time off.

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Surprise Cash Counts Surprise cash counts are a useful fraud prevention method if properly used. It is important that the employees know that the cash will be counted on an irregular and unscheduled basis; however, they should not be advised in advance of an impending cash count.

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