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Financial Transactions Asset Misappropriation: Cash Receipts

fraud. The general methods used to conceal inventory shrinkage are discussed in detail in the
Inventory and Other Assets section.

Detection of Skimming Schemes

The following are some detection methods that may be effective in detecting skimming
schemes:

Receipt or Sales Level Detection

Key analytical procedures, such as vertical and horizontal analysis of sales accounts, can be
used for skimming detection on a grand scale. These procedures analyse changes in the
accounts and can possibly point to skimming problems including understated sales.

Ratio analysis can also provide keys to the detection of skimming schemes. These
procedures are discussed in detail in the Fraudulent Financial Statement section.
Detailed inventory control procedures can also be utilised to detect inventory shrinkage due
to unrecorded sales. Inventory detection methods include statistical sampling, trend analysis,
reviews of receiving reports and inventory records, verification of material requisition and
shipping documentation, as well as actual physical inventory counts. These procedures are
reviewed in the section on Inventory and Other Assets.

Journal Entry Review

Skimming can sometimes be detected by reviewing and analysing all journal entries made to
the cash and inventory accounts. Journal entries involving the following topics should be
examined:
False credits to inventory to conceal unrecorded or understated sales.
Write-offs of lost, stolen, or obsolete inventory.
Write-offs of accounts receivable accounts.
Irregular entries to cash accounts.

Detecting Lapping of Sales or Receivables

Lapping can usually be detected by comparing the dates of the customers payments with the
dates the customers accounts are posted. This will require an examination of the source
documents, such as the composition of bank deposits. Discrepancies should be investigated.

Confirmation of customers accounts is another method that might detect lapping.

Confirmations are especially effective on large accounts where the time value of money is an

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Asset Misappropriation: Cash Receipts Financial Transactions

issue. However, customers who pay on invoice rather than on balance might not know the
exact balance of their account. If this is the case, it might be more effective to confirm by
invoice and reconstruct the account balance using the source documents in the files and the
results of the confirmation. If fraud is suspected, ask the customer or the bank to return a
copy of both the front and the back of the cheque(s) used to pay specific invoices. Match the
data on the cheque copies with the posting dates in the customers account.

Prevention of Skimming Schemes

Receipt or Sales Level Control
As with most fraud schemes, internal control procedures are a key to prevention of
skimming schemes. An essential part of developing control procedures is managements
communication to employees. Controlling whether or not an employee will not record a sale,
understate a sale, or steal incoming payments is extremely difficult.

General Controls
Sales entries and general ledger access controls should include documented policies and
procedures, which are communicated directly from management. The control procedures
will generally cover the following subjects:
Appropriate segregation of duties and access control procedures regarding who makes
ledger transactions will be followed.
Transactions must be properly recorded as to amount, date of occurrence, and ledger
account.
Proper safeguard measures will be adopted to ensure physical access to the account
systems. Additional measures should ensure the security of company assets.
Independent reconciliations as well as internal verification of accounts will be performed
on ledger accounts. 6

Skimming Controls
The discovery of thefts of cheques and cash involves proper controls on the receipt process.
Deficiencies in the answers to these typical audit-program questions may be red flags.
Is mail opened by someone independent of cashier, accounts receivable bookkeeper, or
other accounting employees who may initiate or post journal entries?
Is the delivery of unopened business mail prohibited to employees having access to the
accounting records?

6 George Georgiades, Audit Procedures (New York: Harcourt Brace Professional Publishing, 1995).

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Financial Transactions Asset Misappropriation: Cash Receipts

Does the employee who opens the mail:

Place restrictive endorsements (For Deposit Only) on all cheques received?
Prepare a list of the money, cheques, and other receipts?
Forward all remittances to the person responsible for preparing and making the daily
bank deposit?
Forward the total of all remittances to the person responsible for comparing it to the
authenticated deposit ticket and amount recorded?
Is a lock box used?
Do cash sales occur? If yes:
Are cash receipts prenumbered?
Is an independent cheque of prenumbered receipts done daily and reconciled to cash
collections?
Do cash refunds require approval?
Are cash receipts deposited intact daily?
Are employees who handle receipts bonded?
Is the accounts receivable bookkeeper restricted from:
Preparing the bank deposit?
Obtaining access to the cash receipts book?
Having access to collections from customers?
Are banks instructed not to cash cheques drawn to the order of the company?
Is the cashier restricted from gaining access to the accounts receivable records and bank
and customer statements?
Are areas where physical handling of cash takes place reasonably safeguarded?
Is the person who makes postings to the general ledger independent of the cash receipts
and accounts receivable functions?
Does a person independent of the cashier or accounts receivable functions handle
customer complaints?

Cash Larceny
In the occupational fraud setting, a cash larceny may be defined as the intentional taking of
an employers cash (the term cash includes both currency and cheques) without the consent
and against the will of the employer.

A cash larceny scheme can take place in any circumstance in which an employee has access
to cash. Every company must deal with the receipt, deposit, and distribution of cash, so

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