Principles of Fraud Examination 4th Edition Solution Manual
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ANSWERS TO EXERCISES
Chapter 1
Review Questions
1-1 (Learning objective 1-1) What is fraud examination?
Answer: Fraud examination is a process for resolving allegations of fraud from inception
to disposition. Fraud examinations involve not only financial analysis, but also
interviewing witnesses, taking statements, writing reports, testifying to findings, and
assisting in the prevention and detection of fraud.
1-2 (Learning objective 1-2) What is the fraud theory approach?
Answer: The fraud theory approach is the methodology used for resolving allegations of
fraud by developing a worst-case scenario of what could have occurred, then attempting
to confirm or refute that theory.
1-3 (Learning objective 1-3) Occupational fraud and abuse includes any personal
enrichment that results from misuse or misapplication of the employing organization’s
resources or assets. There are four key elements to this activity. What are they?
Answer: The four key elements to occupational fraud abuse are that it (1) is clandestine,
(2) violates the employee’s fiduciary duties to the organization, (3) is committed for the
purpose of direct or indirect financial benefit to the employee, and (4) costs the
employing organization assets, revenues, or reserves.
1-4 (Learning objective 1-4) Under the common law, fraud generally consists of four
elements, all of which must be present. List them.
Answer: The four legal elements of fraud are (1) a material false statement, (2)
knowledge that the statement was false when it was uttered, (3) reliance on the false
statement by the victim, and (4) damages as a result.
1-5 (Learning objectives 1-4 and 1-5) What is the difference between occupational fraud
and occupational abuse? Give examples.
Answer: Occupational fraud tends to be more costly and less common than abuse.
Occupational fraud consists of such actions as asset misappropriations, corruption, and
fraudulent financial statements. Occupational abuse consists of petty offenses such as
taking extended lunch periods or breaks, showing up late for work or leaving early, and
doing slow or sloppy work.
Chapter 1
Review Questions
1-1 (Learning objective 1-1) What is fraud examination?
Answer: Fraud examination is a process for resolving allegations of fraud from inception
to disposition. Fraud examinations involve not only financial analysis, but also
interviewing witnesses, taking statements, writing reports, testifying to findings, and
assisting in the prevention and detection of fraud.
1-2 (Learning objective 1-2) What is the fraud theory approach?
Answer: The fraud theory approach is the methodology used for resolving allegations of
fraud by developing a worst-case scenario of what could have occurred, then attempting
to confirm or refute that theory.
1-3 (Learning objective 1-3) Occupational fraud and abuse includes any personal
enrichment that results from misuse or misapplication of the employing organization’s
resources or assets. There are four key elements to this activity. What are they?
Answer: The four key elements to occupational fraud abuse are that it (1) is clandestine,
(2) violates the employee’s fiduciary duties to the organization, (3) is committed for the
purpose of direct or indirect financial benefit to the employee, and (4) costs the
employing organization assets, revenues, or reserves.
1-4 (Learning objective 1-4) Under the common law, fraud generally consists of four
elements, all of which must be present. List them.
Answer: The four legal elements of fraud are (1) a material false statement, (2)
knowledge that the statement was false when it was uttered, (3) reliance on the false
statement by the victim, and (4) damages as a result.
1-5 (Learning objectives 1-4 and 1-5) What is the difference between occupational fraud
and occupational abuse? Give examples.
Answer: Occupational fraud tends to be more costly and less common than abuse.
Occupational fraud consists of such actions as asset misappropriations, corruption, and
fraudulent financial statements. Occupational abuse consists of petty offenses such as
taking extended lunch periods or breaks, showing up late for work or leaving early, and
doing slow or sloppy work.
ANSWERS TO EXERCISES
Chapter 1
Review Questions
1-1 (Learning objective 1-1) What is fraud examination?
Answer: Fraud examination is a process for resolving allegations of fraud from inception
to disposition. Fraud examinations involve not only financial analysis, but also
interviewing witnesses, taking statements, writing reports, testifying to findings, and
assisting in the prevention and detection of fraud.
1-2 (Learning objective 1-2) What is the fraud theory approach?
Answer: The fraud theory approach is the methodology used for resolving allegations of
fraud by developing a worst-case scenario of what could have occurred, then attempting
to confirm or refute that theory.
1-3 (Learning objective 1-3) Occupational fraud and abuse includes any personal
enrichment that results from misuse or misapplication of the employing organization’s
resources or assets. There are four key elements to this activity. What are they?
Answer: The four key elements to occupational fraud abuse are that it (1) is clandestine,
(2) violates the employee’s fiduciary duties to the organization, (3) is committed for the
purpose of direct or indirect financial benefit to the employee, and (4) costs the
employing organization assets, revenues, or reserves.
1-4 (Learning objective 1-4) Under the common law, fraud generally consists of four
elements, all of which must be present. List them.
Answer: The four legal elements of fraud are (1) a material false statement, (2)
knowledge that the statement was false when it was uttered, (3) reliance on the false
statement by the victim, and (4) damages as a result.
1-5 (Learning objectives 1-4 and 1-5) What is the difference between occupational fraud
and occupational abuse? Give examples.
Answer: Occupational fraud tends to be more costly and less common than abuse.
Occupational fraud consists of such actions as asset misappropriations, corruption, and
fraudulent financial statements. Occupational abuse consists of petty offenses such as
taking extended lunch periods or breaks, showing up late for work or leaving early, and
doing slow or sloppy work.
Chapter 1
Review Questions
1-1 (Learning objective 1-1) What is fraud examination?
Answer: Fraud examination is a process for resolving allegations of fraud from inception
to disposition. Fraud examinations involve not only financial analysis, but also
interviewing witnesses, taking statements, writing reports, testifying to findings, and
assisting in the prevention and detection of fraud.
1-2 (Learning objective 1-2) What is the fraud theory approach?
Answer: The fraud theory approach is the methodology used for resolving allegations of
fraud by developing a worst-case scenario of what could have occurred, then attempting
to confirm or refute that theory.
1-3 (Learning objective 1-3) Occupational fraud and abuse includes any personal
enrichment that results from misuse or misapplication of the employing organization’s
resources or assets. There are four key elements to this activity. What are they?
Answer: The four key elements to occupational fraud abuse are that it (1) is clandestine,
(2) violates the employee’s fiduciary duties to the organization, (3) is committed for the
purpose of direct or indirect financial benefit to the employee, and (4) costs the
employing organization assets, revenues, or reserves.
1-4 (Learning objective 1-4) Under the common law, fraud generally consists of four
elements, all of which must be present. List them.
Answer: The four legal elements of fraud are (1) a material false statement, (2)
knowledge that the statement was false when it was uttered, (3) reliance on the false
statement by the victim, and (4) damages as a result.
1-5 (Learning objectives 1-4 and 1-5) What is the difference between occupational fraud
and occupational abuse? Give examples.
Answer: Occupational fraud tends to be more costly and less common than abuse.
Occupational fraud consists of such actions as asset misappropriations, corruption, and
fraudulent financial statements. Occupational abuse consists of petty offenses such as
taking extended lunch periods or breaks, showing up late for work or leaving early, and
doing slow or sloppy work.
1-6 (Learning objective 1-7) Edwin H. Sutherland, a criminologist, coined the phrase
“white-collar crime.” What did he mean by this term? How has the meaning of this
phrase changed over time?
Answer: Sutherland coined the term “white-collar crime” to describe criminal acts of
corporations and individuals acting in their corporate capacity (e.g., crime in the
executive suite). Over time, the term has come to encompass almost any financial or
economic crime, from the mailroom to the boardroom.
1-7 (Learning objective 1-7) Sutherland developed what is known as the “theory of
differential association.” What is the principal tenet of his theory?
Answer: The theory of differential association’s principal tenet is that crime is learned.
Sutherland believed that this learning typically occurred in intimate personal groups.
1-8 (Learning objective 1-8) Cressey interviewed nearly 200 embezzlers in order to
develop his theory on the causation of fraud. As a result of his research, what was
Cressey’s final hypothesis?
Answer: “Trusted persons become trust violators when they conceive of themselves as
having a financial problem which is non-shareable, are aware this problem can be
secretly resolved by violation of the position of financial trust, and are able to apply to
their own conduct in that situation verbalizations which enable them to adjust their
conceptions of themselves as trusted persons with their conceptions of themselves as
users of the entrusted property.”
1-9 (Learning objective 1-9) Cressey believed that non-shareable problems provided the
motivation for employees to commit occupational fraud. What did he mean by “non-
shareable”?
Answer: Cressey meant that the problems, at least in the eyes of the potential offenders,
must be kept secret from others, so as to avoid embarrassment or, more importantly, a
loss of status.
1-10 (Learning objective 1-9) Cressey divided the non-shareable problems of the
subjects in his research into six different subtypes. What are they?
Answer: The subtypes are (1) violation of ascribed obligations, (2) problems resulting
from personal failure, (3) business reversals, (4) physical isolation, (5) status gaining,
and (6) employer–employee relations.
“white-collar crime.” What did he mean by this term? How has the meaning of this
phrase changed over time?
Answer: Sutherland coined the term “white-collar crime” to describe criminal acts of
corporations and individuals acting in their corporate capacity (e.g., crime in the
executive suite). Over time, the term has come to encompass almost any financial or
economic crime, from the mailroom to the boardroom.
1-7 (Learning objective 1-7) Sutherland developed what is known as the “theory of
differential association.” What is the principal tenet of his theory?
Answer: The theory of differential association’s principal tenet is that crime is learned.
Sutherland believed that this learning typically occurred in intimate personal groups.
1-8 (Learning objective 1-8) Cressey interviewed nearly 200 embezzlers in order to
develop his theory on the causation of fraud. As a result of his research, what was
Cressey’s final hypothesis?
Answer: “Trusted persons become trust violators when they conceive of themselves as
having a financial problem which is non-shareable, are aware this problem can be
secretly resolved by violation of the position of financial trust, and are able to apply to
their own conduct in that situation verbalizations which enable them to adjust their
conceptions of themselves as trusted persons with their conceptions of themselves as
users of the entrusted property.”
1-9 (Learning objective 1-9) Cressey believed that non-shareable problems provided the
motivation for employees to commit occupational fraud. What did he mean by “non-
shareable”?
Answer: Cressey meant that the problems, at least in the eyes of the potential offenders,
must be kept secret from others, so as to avoid embarrassment or, more importantly, a
loss of status.
1-10 (Learning objective 1-9) Cressey divided the non-shareable problems of the
subjects in his research into six different subtypes. What are they?
Answer: The subtypes are (1) violation of ascribed obligations, (2) problems resulting
from personal failure, (3) business reversals, (4) physical isolation, (5) status gaining,
and (6) employer–employee relations.
1-11 (Learning objective 1-11) Albrecht concluded that there were three factors that led
to occupational fraud. What are they?
Answer: Albrecht’s list is very similar to the fraud triangle. The three factors he
identified are (1) situational pressures, (2) opportunities, and (3) personal integrity.
1-12 (Learning objective 1-12) What factor did Hollinger and Clark identify as the
primary cause of employee deviance?
Answer: The research of Hollinger and Clark strongly suggests that job dissatisfaction
among employees—across all age groups but especially younger workers—is the most
likely cause of counterproductive or illegal behavior in the workplace.
1-13 (Learning objective 1-13) The 2011 Global Fraud Survey covered a number of
factors that are related to occupational fraud. List these factors.
Answer: The 2011 Global Fraud Survey gathered data on occupational fraud and abuse
relating to (1) the cost of fraud and abuse, (2) position, gender, tenure, and criminal
history of the perpetrator, (3) size of the victim organization, (4) actions taken against
occupational fraudsters by their victims, (5) methods by which occupational frauds were
detected, (6) commonness of schemes, and (7) costs associated with various schemes.
Discussion Issues
1-1 (Learning objective 1-1) How does “fraud examination” differ from “forensic
accounting”?
Answer: Fraud examination is a process used to resolve allegations of fraud from
inception to disposition. Forensic accounting is any accounting work done in anticipation
of litigation.
1-2 (Learning objective 1-2) There are several steps involved in the fraud theory
approach. What are they?
Answer: The fraud theory approach involves analyzing the available evidence,
developing a theory of what fraud could have occurred based on a worst-case scenario,
testing the theory, revising it or amending it as necessary, then proving the theory
through additional investigative work.
1-3 (Learning objectives 1-3 through 1-6) How does occupational fraud and abuse differ
from other kinds of fraud? Give examples of other fraud types.
to occupational fraud. What are they?
Answer: Albrecht’s list is very similar to the fraud triangle. The three factors he
identified are (1) situational pressures, (2) opportunities, and (3) personal integrity.
1-12 (Learning objective 1-12) What factor did Hollinger and Clark identify as the
primary cause of employee deviance?
Answer: The research of Hollinger and Clark strongly suggests that job dissatisfaction
among employees—across all age groups but especially younger workers—is the most
likely cause of counterproductive or illegal behavior in the workplace.
1-13 (Learning objective 1-13) The 2011 Global Fraud Survey covered a number of
factors that are related to occupational fraud. List these factors.
Answer: The 2011 Global Fraud Survey gathered data on occupational fraud and abuse
relating to (1) the cost of fraud and abuse, (2) position, gender, tenure, and criminal
history of the perpetrator, (3) size of the victim organization, (4) actions taken against
occupational fraudsters by their victims, (5) methods by which occupational frauds were
detected, (6) commonness of schemes, and (7) costs associated with various schemes.
Discussion Issues
1-1 (Learning objective 1-1) How does “fraud examination” differ from “forensic
accounting”?
Answer: Fraud examination is a process used to resolve allegations of fraud from
inception to disposition. Forensic accounting is any accounting work done in anticipation
of litigation.
1-2 (Learning objective 1-2) There are several steps involved in the fraud theory
approach. What are they?
Answer: The fraud theory approach involves analyzing the available evidence,
developing a theory of what fraud could have occurred based on a worst-case scenario,
testing the theory, revising it or amending it as necessary, then proving the theory
through additional investigative work.
1-3 (Learning objectives 1-3 through 1-6) How does occupational fraud and abuse differ
from other kinds of fraud? Give examples of other fraud types.
Answer: Typically, any crime that uses deceit as its principal modus operandi is
considered fraud. Occupational fraud involves those frauds that are committed against
organizations by individuals who work for those organizations. Other fraud types include
but are not limited to: insurance frauds committed by customers and policyholders,
Internet frauds and scams perpetrated by individuals, frauds against governmental
organizations committed by companies and individuals, frauds against banks committed
by outsiders, and credit card frauds perpetrated against businesses.
1-4 (Learning objectives 1-7 and 1-8) How does the study of criminology relate to the
detection or deterrence of fraud? How does it differ from the study of accounting or
auditing?
Answer: Criminals commit frauds. Accounting relates to the classification of assets,
liabilities, income, expenses, and equity. Auditing involves the verification of books and
records. While accounting and auditing give us information on how fraud is committed,
the study of criminology helps us understand why fraud is committed. The simple fact is
that books don’t commit fraud, people do. Understanding both how and why fraud is
committed helps us better detect and deter it.
1-5 (Learning objective 1-7) Sutherland’s contribution to criminology, in addition to
giving us the term “white-collar crime,” involved developing the theory of differential -
association. What are the implications of this theory with respect to occupational fraud?
Answer: Sutherland’s main point was that the tendency to commit crime is learned, not
inherited. He believed that criminals learned both the techniques of committing crimes
and the value systems of criminals in small, intimate groups. This explains, in part, why
prisoners frequently return to crime after they are let out of confinement. While behind
bars, they talk to other inmates and learn the specifics of how to better commit their
crimes. They also are taught the unique values that “street” criminals hold, such as
“getting something for nothing” and “society owes me a good living.”
Occupational fraudsters, on the other hand, learn their techniques by working
with books, records, inventory, and other assets. They frequently hear about other
employees who were not successful in their crimes. Rather than being discouraged by
someone being caught, the potential criminal often learns a different lesson: that the
method the other person used to commit fraud was faulty and that a different one must be
devised in order to succeed. They also learn the value systems that some businesses have:
Profit is everything, and the end justifies the means. Such values obviously send the
wrong message.
considered fraud. Occupational fraud involves those frauds that are committed against
organizations by individuals who work for those organizations. Other fraud types include
but are not limited to: insurance frauds committed by customers and policyholders,
Internet frauds and scams perpetrated by individuals, frauds against governmental
organizations committed by companies and individuals, frauds against banks committed
by outsiders, and credit card frauds perpetrated against businesses.
1-4 (Learning objectives 1-7 and 1-8) How does the study of criminology relate to the
detection or deterrence of fraud? How does it differ from the study of accounting or
auditing?
Answer: Criminals commit frauds. Accounting relates to the classification of assets,
liabilities, income, expenses, and equity. Auditing involves the verification of books and
records. While accounting and auditing give us information on how fraud is committed,
the study of criminology helps us understand why fraud is committed. The simple fact is
that books don’t commit fraud, people do. Understanding both how and why fraud is
committed helps us better detect and deter it.
1-5 (Learning objective 1-7) Sutherland’s contribution to criminology, in addition to
giving us the term “white-collar crime,” involved developing the theory of differential -
association. What are the implications of this theory with respect to occupational fraud?
Answer: Sutherland’s main point was that the tendency to commit crime is learned, not
inherited. He believed that criminals learned both the techniques of committing crimes
and the value systems of criminals in small, intimate groups. This explains, in part, why
prisoners frequently return to crime after they are let out of confinement. While behind
bars, they talk to other inmates and learn the specifics of how to better commit their
crimes. They also are taught the unique values that “street” criminals hold, such as
“getting something for nothing” and “society owes me a good living.”
Occupational fraudsters, on the other hand, learn their techniques by working
with books, records, inventory, and other assets. They frequently hear about other
employees who were not successful in their crimes. Rather than being discouraged by
someone being caught, the potential criminal often learns a different lesson: that the
method the other person used to commit fraud was faulty and that a different one must be
devised in order to succeed. They also learn the value systems that some businesses have:
Profit is everything, and the end justifies the means. Such values obviously send the
wrong message.
1-6 (Learning objective 1-8) Cressey’s “fraud triangle” states that three factors—non-
shareable financial need, perceived opportunity, and rationalization—are present in cases
of occupational fraud. Which of these three factors, if any, is the most important in
causing executives, managers, and employees to commit occupational fraud?
Answer: All three are equally important. A fire cannot exist without fuel, oxygen, and
heat; a fraud cannot exist without motive, opportunity, and rationalization. If a person
has unlimited motive but no opportunity, he or she cannot commit fraud. If a person has
opportunity but doesn’t need the money, the fraud is unlikely to occur. Should an
individual have both motive and opportunity but cannot salve his or her conscience
through rationalization, the crime will most likely not be committed.
1-7 (Learning objectives 1-8 and 1-9) Cressey described a number of non-shareable
financial problems that he uncovered during his research. Which of these, if any, apply to
modern-day executives who are responsible for large financial statement frauds? In the
50-plus years since Cressey did his study, are the factors he described still valid? Why or
why not?
Answer: Three non-shareable financial problems seem to be at the root of today’s
financial frauds: violation of ascribed obligations, problems resulting from personal
failure, and business reversals. Many modern-day businesses begin “cooking the books”
when executives realize that they will not be able to meet their financial obligations.
Similarly, some executives are too ashamed to admit that they don’t have the talent or
wherewithal to steer an enterprise through rough economic conditions. And sometimes,
business reversals—from loss of a major client or contract, recessions, high costs of -
capital, and the like—are at the root of these so-called non-shareable financial problems.
One could argue that these factors are as valid today as they were over half a
century ago. What motivates people to act changes little over time, although the methods
that they use to accomplish their illegal goals (e.g., computer frauds) may.
1-8 (Learning objectives 1-8 through 1-11) Albrecht, in his research, developed the
“fraud scale” and furnished a list of the reasons employees and executives commit
occupational fraud. How are Albrecht’s conclusions similar to Cressey’s? How are they -
different?
Answer: Cressey’s three factors were a non-shareable financial need, perceived
opportunity, and rationalization. Albrecht’s consisted of financial pressure, perceived -
opportunity, and personal integrity. One of the factors, perceived opportunity, was
shareable financial need, perceived opportunity, and rationalization—are present in cases
of occupational fraud. Which of these three factors, if any, is the most important in
causing executives, managers, and employees to commit occupational fraud?
Answer: All three are equally important. A fire cannot exist without fuel, oxygen, and
heat; a fraud cannot exist without motive, opportunity, and rationalization. If a person
has unlimited motive but no opportunity, he or she cannot commit fraud. If a person has
opportunity but doesn’t need the money, the fraud is unlikely to occur. Should an
individual have both motive and opportunity but cannot salve his or her conscience
through rationalization, the crime will most likely not be committed.
1-7 (Learning objectives 1-8 and 1-9) Cressey described a number of non-shareable
financial problems that he uncovered during his research. Which of these, if any, apply to
modern-day executives who are responsible for large financial statement frauds? In the
50-plus years since Cressey did his study, are the factors he described still valid? Why or
why not?
Answer: Three non-shareable financial problems seem to be at the root of today’s
financial frauds: violation of ascribed obligations, problems resulting from personal
failure, and business reversals. Many modern-day businesses begin “cooking the books”
when executives realize that they will not be able to meet their financial obligations.
Similarly, some executives are too ashamed to admit that they don’t have the talent or
wherewithal to steer an enterprise through rough economic conditions. And sometimes,
business reversals—from loss of a major client or contract, recessions, high costs of -
capital, and the like—are at the root of these so-called non-shareable financial problems.
One could argue that these factors are as valid today as they were over half a
century ago. What motivates people to act changes little over time, although the methods
that they use to accomplish their illegal goals (e.g., computer frauds) may.
1-8 (Learning objectives 1-8 through 1-11) Albrecht, in his research, developed the
“fraud scale” and furnished a list of the reasons employees and executives commit
occupational fraud. How are Albrecht’s conclusions similar to Cressey’s? How are they -
different?
Answer: Cressey’s three factors were a non-shareable financial need, perceived
opportunity, and rationalization. Albrecht’s consisted of financial pressure, perceived -
opportunity, and personal integrity. One of the factors, perceived opportunity, was
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named by both researchers. Cressey’s non-shareable financial need is similar to
Albrecht’s financial pressure; however, Cressey’s is more specific. Nearly everyone
suffers financial pressures of some kind, but most do not turn to fraud in order to
alleviate them. The ability to rationalize illegal conduct and personal integrity could be
viewed as one and the same. However, personal integrity is difficult to measure, while
specific rationalizations are easier to identify.
1-9 (Learning objective 1-13) The ACFE’s 2011 Global Fraud Survey found, among
other things, that the frauds committed by women had smaller median losses than those
by men. What are some possible explanations for this finding?
Answer: The sizes of losses due to occupational fraud are almost always determined by
the employee’s access to assets. This explains why executives account for the largest
losses. Women, because of the so-called “glass ceiling” (where they are not promoted
into jobs equal to their male counterparts’), typically occupy lower-level positions.
Chapter 2
Review Questions
2-1 (Learning objective 2-1) How is “skimming” defined?
Answer: Skimming is the theft of cash from a victim organization prior to its entry in the
organization’s accounting system.
2-2 (Learning objective 2-2) What are the two principal categories of skimming?
Answer: Skimming schemes can be subdivided based on whether they target sales or
receivables. The character of the incoming funds has an effect on how the frauds are
concealed, and concealment is the crucial element of most occupational fraud schemes.
2-3 (Learning objective 2-3) How do sales skimming schemes leave a victim
organization’s books in balance, despite the theft of funds?
Answer: When an employee skims money by making off-book sales of merchandise,
neither the sales transaction nor the incoming cash is ever recorded. For example,
suppose a cash register clerk skims $500 in receipts from one sale of goods. At the end of
the day, his cash drawer will be short by $500—the amount of money that was stolen. But
because the sale was never recorded, the sales records will be understated by $500.
Therefore, the books will remain in balance.
Albrecht’s financial pressure; however, Cressey’s is more specific. Nearly everyone
suffers financial pressures of some kind, but most do not turn to fraud in order to
alleviate them. The ability to rationalize illegal conduct and personal integrity could be
viewed as one and the same. However, personal integrity is difficult to measure, while
specific rationalizations are easier to identify.
1-9 (Learning objective 1-13) The ACFE’s 2011 Global Fraud Survey found, among
other things, that the frauds committed by women had smaller median losses than those
by men. What are some possible explanations for this finding?
Answer: The sizes of losses due to occupational fraud are almost always determined by
the employee’s access to assets. This explains why executives account for the largest
losses. Women, because of the so-called “glass ceiling” (where they are not promoted
into jobs equal to their male counterparts’), typically occupy lower-level positions.
Chapter 2
Review Questions
2-1 (Learning objective 2-1) How is “skimming” defined?
Answer: Skimming is the theft of cash from a victim organization prior to its entry in the
organization’s accounting system.
2-2 (Learning objective 2-2) What are the two principal categories of skimming?
Answer: Skimming schemes can be subdivided based on whether they target sales or
receivables. The character of the incoming funds has an effect on how the frauds are
concealed, and concealment is the crucial element of most occupational fraud schemes.
2-3 (Learning objective 2-3) How do sales skimming schemes leave a victim
organization’s books in balance, despite the theft of funds?
Answer: When an employee skims money by making off-book sales of merchandise,
neither the sales transaction nor the incoming cash is ever recorded. For example,
suppose a cash register clerk skims $500 in receipts from one sale of goods. At the end of
the day, his cash drawer will be short by $500—the amount of money that was stolen. But
because the sale was never recorded, the sales records will be understated by $500.
Therefore, the books will remain in balance.
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2-4 (Learning objective 2-3) Under what circumstances are incoming checks received
through the mail typically stolen?
Answer: Checks are normally stolen when a single employee is in charge of opening the
mail and preparing the deposit. The employee simply removes the check from the
incoming mail and forges the endorsement of the employer, then endorses it with his or
her own name and cashes or deposits it.
2-5 (Learning objective 2-4) How do “understated sales” schemes differ from
“unrecorded sales”?
Answer: Unrecorded sales schemes are purely off-book transactions. Understated sales,
on the other hand, are posted to the victim organization’s books, but for a lower amount
than what the perpetrator collected from the customer. Typically, the perpetrator will
understate a sale by recording a lower sales price for a particular item, or by recording
the sale of fewer items of merchandise than the customer actually purchased.
2-6 (Learning objective 2-5) How is the cash register manipulated to conceal skimming?
Answer: There are two common methods. The first is to ring “no sale” on the register
and omit giving the customer a receipt for the purchase. The second and less common
method is for the cashier to alter the tape itself so that it does not show the sale. This is
impossible to accomplish with cash registers that also record the transaction
electronically.
2-7 (Learning objective 2-6) Give examples of skimming during nonbusiness hours and
skimming of off-site sales.
Answer: Certain categories of employees usually commit these schemes. Managers of
department stores or employees opening or closing the store have been known to open
early or close late and skim all or part of the sales during those periods. Apartment
rental employees, parking lot attendants, and independent salespeople are at a higher
risk of skimming funds from off-site sales.
2-8 (Learning objective 2-8) What are the six principal methods used to conceal
receivables skimming?
Answer: The six concealment techniques identified in this chapter are: lapping, force
balancing, stealing customer statements, recording fraudulent write-offs or discounts,
debiting the wrong account, and document destruction.
through the mail typically stolen?
Answer: Checks are normally stolen when a single employee is in charge of opening the
mail and preparing the deposit. The employee simply removes the check from the
incoming mail and forges the endorsement of the employer, then endorses it with his or
her own name and cashes or deposits it.
2-5 (Learning objective 2-4) How do “understated sales” schemes differ from
“unrecorded sales”?
Answer: Unrecorded sales schemes are purely off-book transactions. Understated sales,
on the other hand, are posted to the victim organization’s books, but for a lower amount
than what the perpetrator collected from the customer. Typically, the perpetrator will
understate a sale by recording a lower sales price for a particular item, or by recording
the sale of fewer items of merchandise than the customer actually purchased.
2-6 (Learning objective 2-5) How is the cash register manipulated to conceal skimming?
Answer: There are two common methods. The first is to ring “no sale” on the register
and omit giving the customer a receipt for the purchase. The second and less common
method is for the cashier to alter the tape itself so that it does not show the sale. This is
impossible to accomplish with cash registers that also record the transaction
electronically.
2-7 (Learning objective 2-6) Give examples of skimming during nonbusiness hours and
skimming of off-site sales.
Answer: Certain categories of employees usually commit these schemes. Managers of
department stores or employees opening or closing the store have been known to open
early or close late and skim all or part of the sales during those periods. Apartment
rental employees, parking lot attendants, and independent salespeople are at a higher
risk of skimming funds from off-site sales.
2-8 (Learning objective 2-8) What are the six principal methods used to conceal
receivables skimming?
Answer: The six concealment techniques identified in this chapter are: lapping, force
balancing, stealing customer statements, recording fraudulent write-offs or discounts,
debiting the wrong account, and document destruction.
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2-9 (Learning objective 2-9) What is “lapping” and how is it used to conceal receivables
skimming?
Answer: Lapping is the crediting of one account through the abstraction of money from
another account. Lapping customer payments is one of the most common methods of
concealing receivables skimming. Suppose a company has three customers, A, B, and C.
When A’s payment is received, the fraudster takes it for himself instead of posting it to
A’s account. When B’s check arrives, the fraudster posts it as a payment to A’s account.
Likewise, when C’s payment is received, the perpetrator applies it to B’s account. This
process continues indefinitely until one of three things happens: (1) someone discovers
the scheme, (2) restitution is made to the accounts, or (3) some concealing entry is made
to adjust the accounts receivable balances.
2-10 (Learning objective 2-10) List four types of false entries a fraudster can make in the
victim organization’s books to conceal receivables skimming.
Answer: The fraudster can lap the payments, as discussed in the previous question. He
can also engage in force balancing by posting a payment to a customer’s account even
though the payment was stolen. A third false entry that can be made is to fraudulently
write off a customer’s account as uncollectible. A fourth technique is to credit the
targeted account with a fraudulent “discount” in the amount of the stolen funds. Also,
some fraudsters conceal receivables skimming by debiting existing or fictitious accounts
receivable.
Discussion Issues
2-1 (Learning objective 2-3) Sales skimming is called an “off-book” fraud. Why?
Answer: Simply because the fraud occurs outside the books and records. There is no
direct audit trail to uncover; the proof of the fraud must be determined by indirect
methods, such as ratio analysis or other comparisons.
2-2 (Learning objective 2-3) In the case study of Brian Lee, the plastic surgeon, what
kind of skimming scheme did he commit?
Answer: Dr. Lee committed a sales (revenue) skimming scheme. In this fraud, Dr. Lee’s
clinic was a partnership with several other doctors, and all of the revenue derived from
his services was supposed to go to the partnership. Because of a lack of controls and
periodic reconciliations by the clinic, Dr. Lee simply instructed his patients to pay him
directly. His scheme was uncovered by accident, as are many frauds.
skimming?
Answer: Lapping is the crediting of one account through the abstraction of money from
another account. Lapping customer payments is one of the most common methods of
concealing receivables skimming. Suppose a company has three customers, A, B, and C.
When A’s payment is received, the fraudster takes it for himself instead of posting it to
A’s account. When B’s check arrives, the fraudster posts it as a payment to A’s account.
Likewise, when C’s payment is received, the perpetrator applies it to B’s account. This
process continues indefinitely until one of three things happens: (1) someone discovers
the scheme, (2) restitution is made to the accounts, or (3) some concealing entry is made
to adjust the accounts receivable balances.
2-10 (Learning objective 2-10) List four types of false entries a fraudster can make in the
victim organization’s books to conceal receivables skimming.
Answer: The fraudster can lap the payments, as discussed in the previous question. He
can also engage in force balancing by posting a payment to a customer’s account even
though the payment was stolen. A third false entry that can be made is to fraudulently
write off a customer’s account as uncollectible. A fourth technique is to credit the
targeted account with a fraudulent “discount” in the amount of the stolen funds. Also,
some fraudsters conceal receivables skimming by debiting existing or fictitious accounts
receivable.
Discussion Issues
2-1 (Learning objective 2-3) Sales skimming is called an “off-book” fraud. Why?
Answer: Simply because the fraud occurs outside the books and records. There is no
direct audit trail to uncover; the proof of the fraud must be determined by indirect
methods, such as ratio analysis or other comparisons.
2-2 (Learning objective 2-3) In the case study of Brian Lee, the plastic surgeon, what
kind of skimming scheme did he commit?
Answer: Dr. Lee committed a sales (revenue) skimming scheme. In this fraud, Dr. Lee’s
clinic was a partnership with several other doctors, and all of the revenue derived from
his services was supposed to go to the partnership. Because of a lack of controls and
periodic reconciliations by the clinic, Dr. Lee simply instructed his patients to pay him
directly. His scheme was uncovered by accident, as are many frauds.
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2-3 (Learning objectives 2-5 and 2-12) If you suspected skimming of sales at the cash
register, what is one of the first things you would check?
Answer: The cash register tape is one of the first things you should check. In a typical
cash register skimming scheme, the crooked employee will ring up “no sale” on the
register when a sale is made and pocket the money. The customer is not given a receipt.
If you notice an excessive amount of “no sales” entered on the cash register, it could
mean that the drawer is being opened and no money is being put in.
2-4 (Learning objective 2-3) Assume a client who owns a small apartment complex in a
different city than where he lives has discovered that the apartment manager has been
skimming rental receipts, which are usually paid by check. The manager endorsed the
checks with the apartment rental stamp, then endorsed her own name and deposited the
proceeds into her own checking account. Because of the size of the operation, hiring a
separate employee to keep the books is not practical. How could a scheme like this be
prevented in the future?
Answer: Two simple, separate control measures might help prevent such future
occurrences. Although it might not be practical for the owner to reconcile the rental
receipts himself since he lives in a different city, he could obtain a restrictive
endorsement stamps that states “for deposit only.” Second, the owner could have rental
payments directed to a bank lockbox, where they would be less likely to be stolen.
2-5 (Learning objectives 2-8 and 2-11) What is the most effective control to prevent
receivables skimming?
Answer: In almost all cases of receivables skimming, the person handling the cash and
the person keeping the books are one and the same. An employee who opens incoming
mail or handles cash should not be permitted to post the transactions.
2-6 (Learning objectives 2-3 and 2-7) In many cases involving skimming, employees
steal checks from the incoming mail. What are some of the controls that can prevent such
occurrences?
Answer: Here are some of the basic controls over incoming checks:
• The person opening the mail should be independent of the cashier, accounts
receivable clerk, or employees who are authorized to initiate or post journal entries.
• Unopened mail should not be delivered to employees having access to accounting
records.
register, what is one of the first things you would check?
Answer: The cash register tape is one of the first things you should check. In a typical
cash register skimming scheme, the crooked employee will ring up “no sale” on the
register when a sale is made and pocket the money. The customer is not given a receipt.
If you notice an excessive amount of “no sales” entered on the cash register, it could
mean that the drawer is being opened and no money is being put in.
2-4 (Learning objective 2-3) Assume a client who owns a small apartment complex in a
different city than where he lives has discovered that the apartment manager has been
skimming rental receipts, which are usually paid by check. The manager endorsed the
checks with the apartment rental stamp, then endorsed her own name and deposited the
proceeds into her own checking account. Because of the size of the operation, hiring a
separate employee to keep the books is not practical. How could a scheme like this be
prevented in the future?
Answer: Two simple, separate control measures might help prevent such future
occurrences. Although it might not be practical for the owner to reconcile the rental
receipts himself since he lives in a different city, he could obtain a restrictive
endorsement stamps that states “for deposit only.” Second, the owner could have rental
payments directed to a bank lockbox, where they would be less likely to be stolen.
2-5 (Learning objectives 2-8 and 2-11) What is the most effective control to prevent
receivables skimming?
Answer: In almost all cases of receivables skimming, the person handling the cash and
the person keeping the books are one and the same. An employee who opens incoming
mail or handles cash should not be permitted to post the transactions.
2-6 (Learning objectives 2-3 and 2-7) In many cases involving skimming, employees
steal checks from the incoming mail. What are some of the controls that can prevent such
occurrences?
Answer: Here are some of the basic controls over incoming checks:
• The person opening the mail should be independent of the cashier, accounts
receivable clerk, or employees who are authorized to initiate or post journal entries.
• Unopened mail should not be delivered to employees having access to accounting
records.
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• The employee who opens the mail should (1) place restrictive endorsements on the
incoming checks; (2) prepare a list of checks received; (3) forward all remittances to
the person responsible for preparing and making the bank deposit; and (4) forward
the list of checks to a person who can check to see if it agrees with the bank deposit.
2-7 (Learning objectives 2-7 and 2-11) In the case study of Stefan Winkler, who was the
chief financial officer for a beverage company in Florida, how did he conceal his
skimming scheme? How could the scheme have been prevented or discovered?
Answer: Winkler’s scheme is a classic example of too much trust placed in one employee.
The beverage company received money from two different sources: route deposits (cash
sales) and office deposits (accounts receivable). The route salespeople prepared their
own deposit slips showing the cash and currency collected. The office personnel listed
and accounted for the checks received through the mail. Winkler removed currency from
the route deposits and replaced it with a check for the same amount from office deposits.
Although office personnel listed the checks, they did not prepare the deposit slips—
Winkler did that. As a result, he would ensure that the bank deposits agreed with the
amount of money going into the bank.
To cover his tracks with the credit customers, Winkler would lap payments made by
one customer to cover thefts from another customer. He would also give unauthorized
discounts to credit customers. When Winkler was fired for other reasons, he made a
general ledger adjustment of over $300,000 in a vain attempt to cover the shortages.
There were many clues: The internal control deficiencies were glaring. All of the
cash made a stop at Winkler’s desk on its way to the bank. Had there been adequate
division of responsibilities, Winkler’s scheme would have been much more difficult to
accomplish. There were excessive false discounts to customers. The cost of sales would
have been out of line with sales. And, like so many other fraudsters, Winkler lived beyond
his means. Had his fellow employees been properly educated about fraud, they would
have easily seen the fact that Winkler was driving a $75,000 car as a red flag. Also, had
they been to his home, they would have noticed that their chief financial officer lived in
an excessively expensive residence.
Chapter 3
Review Questions
3-1 (Learning objective 3-1) What is cash larceny?
incoming checks; (2) prepare a list of checks received; (3) forward all remittances to
the person responsible for preparing and making the bank deposit; and (4) forward
the list of checks to a person who can check to see if it agrees with the bank deposit.
2-7 (Learning objectives 2-7 and 2-11) In the case study of Stefan Winkler, who was the
chief financial officer for a beverage company in Florida, how did he conceal his
skimming scheme? How could the scheme have been prevented or discovered?
Answer: Winkler’s scheme is a classic example of too much trust placed in one employee.
The beverage company received money from two different sources: route deposits (cash
sales) and office deposits (accounts receivable). The route salespeople prepared their
own deposit slips showing the cash and currency collected. The office personnel listed
and accounted for the checks received through the mail. Winkler removed currency from
the route deposits and replaced it with a check for the same amount from office deposits.
Although office personnel listed the checks, they did not prepare the deposit slips—
Winkler did that. As a result, he would ensure that the bank deposits agreed with the
amount of money going into the bank.
To cover his tracks with the credit customers, Winkler would lap payments made by
one customer to cover thefts from another customer. He would also give unauthorized
discounts to credit customers. When Winkler was fired for other reasons, he made a
general ledger adjustment of over $300,000 in a vain attempt to cover the shortages.
There were many clues: The internal control deficiencies were glaring. All of the
cash made a stop at Winkler’s desk on its way to the bank. Had there been adequate
division of responsibilities, Winkler’s scheme would have been much more difficult to
accomplish. There were excessive false discounts to customers. The cost of sales would
have been out of line with sales. And, like so many other fraudsters, Winkler lived beyond
his means. Had his fellow employees been properly educated about fraud, they would
have easily seen the fact that Winkler was driving a $75,000 car as a red flag. Also, had
they been to his home, they would have noticed that their chief financial officer lived in
an excessively expensive residence.
Chapter 3
Review Questions
3-1 (Learning objective 3-1) What is cash larceny?
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Answer: Cash larceny involves the intentional taking away of an employer’s cash without
the consent, and against the will, of the employer. Cash larceny schemes involve the theft
of money that has already appeared on the victim company’s books.
3-2 (Learning objective 3-2) How do cash larceny schemes differ from fraudulent
disbursements?
Answer: Cash larceny schemes generally target receipts, not disbursements.
Furthermore, larceny schemes usually involve the physical misappropriation of cash by
the perpetrator. The method of extraction—for instance, a perpetrator putting cash in his
pocket—is itself improper. Fraudulent disbursements, on the other hand, typically rely on
the submission of phony documents or the forging of signatures in order to make a
fraudulent distribution of funds appear to be legitimate. The manner by which funds are
disbursed is the same as in any legitimate disbursement, but the purpose of the
distribution is fraudulent.
3-3 (Learning objective 3-3) What is the difference between cash larceny and skimming?
Answer: Both cash larceny and cash skimming schemes involve theft of the victim
company’s funds. However, cash larceny involves the removal of money after it has been
recorded in the company’s books, whereas skimming involves the removal of cash before
the funds appear on the books. In other words, cash larceny is an on-book fraud, whereas
skimming is an off-book fraud.
3-4 (Learning objective 3-4) Where do cash larceny schemes rank among cash
misappropriations in terms of frequency? In terms of median loss?
Answer: In the 2011 Global Fraud Survey, cash larceny schemes were less common than
both skimming and fraudulent disbursements schemes. This is to be expected, as cash
larceny is an on-book form of fraud that leaves an imbalance on the victim organization’s
books. This makes cash larceny more difficult to conceal than other forms of cash
misappropriation. The median loss for cash larceny schemes was greater than that for
skimming schemes, but lower than that for fraudulent disbursements schemes.
3-5 (Learning objective 3-5) What are the main weaknesses in an internal control system
that permit fraudsters the opportunity to commit cash larceny schemes?
Answer: Cash larceny schemes can take place under any circumstances in which an
employee has access to cash; therefore, regular supervision and surveillance controls
may prevent the opportunity for theft to occur. The lack of, or inadequate, separation of
the consent, and against the will, of the employer. Cash larceny schemes involve the theft
of money that has already appeared on the victim company’s books.
3-2 (Learning objective 3-2) How do cash larceny schemes differ from fraudulent
disbursements?
Answer: Cash larceny schemes generally target receipts, not disbursements.
Furthermore, larceny schemes usually involve the physical misappropriation of cash by
the perpetrator. The method of extraction—for instance, a perpetrator putting cash in his
pocket—is itself improper. Fraudulent disbursements, on the other hand, typically rely on
the submission of phony documents or the forging of signatures in order to make a
fraudulent distribution of funds appear to be legitimate. The manner by which funds are
disbursed is the same as in any legitimate disbursement, but the purpose of the
distribution is fraudulent.
3-3 (Learning objective 3-3) What is the difference between cash larceny and skimming?
Answer: Both cash larceny and cash skimming schemes involve theft of the victim
company’s funds. However, cash larceny involves the removal of money after it has been
recorded in the company’s books, whereas skimming involves the removal of cash before
the funds appear on the books. In other words, cash larceny is an on-book fraud, whereas
skimming is an off-book fraud.
3-4 (Learning objective 3-4) Where do cash larceny schemes rank among cash
misappropriations in terms of frequency? In terms of median loss?
Answer: In the 2011 Global Fraud Survey, cash larceny schemes were less common than
both skimming and fraudulent disbursements schemes. This is to be expected, as cash
larceny is an on-book form of fraud that leaves an imbalance on the victim organization’s
books. This makes cash larceny more difficult to conceal than other forms of cash
misappropriation. The median loss for cash larceny schemes was greater than that for
skimming schemes, but lower than that for fraudulent disbursements schemes.
3-5 (Learning objective 3-5) What are the main weaknesses in an internal control system
that permit fraudsters the opportunity to commit cash larceny schemes?
Answer: Cash larceny schemes can take place under any circumstances in which an
employee has access to cash; therefore, regular supervision and surveillance controls
may prevent the opportunity for theft to occur. The lack of, or inadequate, separation of
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duties for receiving, recording, depositing, and disbursing cash permit cash larceny
schemes to occur.
3-6 (Learning objective 3-6) What are the five methods discussed in this chapter that are
used to conceal cash larceny that occurs at the point of sale? Explain how each works.
Answer: In the cash larceny schemes reviewed, there were five methods that were
identified as being used to conceal larceny at the point of sale. The first was thefts from
other registers, in which an employee steals cash from another person’s cash register.
This does not conceal the crime, but it may help conceal the perpetrator’s identity. The
second method was death by a thousand cuts, in which an employee repeatedly steals
very small amounts of cash over an extended period of time, hoping that the thefts are
small enough to avoid triggering an investigation. The third method is the use of
reversing transactions. After the perpetrator has stolen cash, he processes fraudulent
refunds or voids sales in order to bring sales records back into balance with cash on
hand. The fourth method is to alter cash counts or cash register tapes. Totals are
misreported to create a fictitious balance between cash on hand and sales. The fifth
method is to destroy sales records, which makes it difficult for the victim organization to
discover an imbalance caused by larceny.
3-7 (Learning objective 3-8) How do employees commit cash larceny of incoming
receivables? How are the schemes concealed?
Answer: Fraudsters may post the customer’s payment to the accounting system but steal
the cash, which causes an imbalance in the cash account. This imbalance can be
concealed if the perpetrator has control over the recording function for ledger accounts.
The fraudster makes unsubstantiated entries, which produce fictitious balances. Other
ways to conceal cash larceny include using reversing transactions, creating unauthorized
discounts, charging the theft to bad debts, or adjusting the inventory account. Alternately,
the perpetrator simply may destroy all records of the transaction.
3-8 (Learning objective 3-8) What is force balancing and how is it used to conceal cash
larceny?
Answer: Force balancing involves the making of unsupported entries in an
organization’s books and records to produce a fictitious balance. For example, if an
employee steals an incoming receivables payment after it has been posted to the
appropriate customer account, this will create a shortage in the cash account because the
amount of receipts posted will exceed the amount of receipts on hand. If the employee is
schemes to occur.
3-6 (Learning objective 3-6) What are the five methods discussed in this chapter that are
used to conceal cash larceny that occurs at the point of sale? Explain how each works.
Answer: In the cash larceny schemes reviewed, there were five methods that were
identified as being used to conceal larceny at the point of sale. The first was thefts from
other registers, in which an employee steals cash from another person’s cash register.
This does not conceal the crime, but it may help conceal the perpetrator’s identity. The
second method was death by a thousand cuts, in which an employee repeatedly steals
very small amounts of cash over an extended period of time, hoping that the thefts are
small enough to avoid triggering an investigation. The third method is the use of
reversing transactions. After the perpetrator has stolen cash, he processes fraudulent
refunds or voids sales in order to bring sales records back into balance with cash on
hand. The fourth method is to alter cash counts or cash register tapes. Totals are
misreported to create a fictitious balance between cash on hand and sales. The fifth
method is to destroy sales records, which makes it difficult for the victim organization to
discover an imbalance caused by larceny.
3-7 (Learning objective 3-8) How do employees commit cash larceny of incoming
receivables? How are the schemes concealed?
Answer: Fraudsters may post the customer’s payment to the accounting system but steal
the cash, which causes an imbalance in the cash account. This imbalance can be
concealed if the perpetrator has control over the recording function for ledger accounts.
The fraudster makes unsubstantiated entries, which produce fictitious balances. Other
ways to conceal cash larceny include using reversing transactions, creating unauthorized
discounts, charging the theft to bad debts, or adjusting the inventory account. Alternately,
the perpetrator simply may destroy all records of the transaction.
3-8 (Learning objective 3-8) What is force balancing and how is it used to conceal cash
larceny?
Answer: Force balancing involves the making of unsupported entries in an
organization’s books and records to produce a fictitious balance. For example, if an
employee steals an incoming receivables payment after it has been posted to the
appropriate customer account, this will create a shortage in the cash account because the
amount of receipts posted will exceed the amount of receipts on hand. If the employee is
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able to make one or more unsubstantiated entries to cash in the amount of the stolen
payment, he or she can eliminate the imbalance.
3-9 (Learning objective 3-9) How do fraudsters commit cash larceny from the bank
deposit?
Answer: Fraudsters steal all or part of the deposit and conceal the scheme by destroying
the bank statement, or by showing the deposits as “in transit.” This type of scheme is
usually effective when there is a poor internal control system over cash collections and
deposits, in which the same employee may be responsible for cash collections, preparing
deposit slips, making deposits, and reconciling bank statements. The fraudster may also
alter the deposit slip after it has been returned in the bank statement.
3-10 (Learning objectives 3-5, 3-7, and 3-10) What are some basic internal control
procedures to deter and detect cash larceny schemes?
Answer: The separation of duties related to cash receipts, deposits, and recording is a
basic internal control to deter and detect cash larceny schemes. This includes
segregation of authorization, recording, and custody functions for cash and related
transactions. Assignment rotation, mandatory vacations, surprise cash counts, and
physical security of cash can also assist in deterring and detecting cash larceny schemes.
Discussion Issues
3-1 (Learning objectives 3-1, 3-6, 3-8, and 3-9) Briefly describe some common types of
cash larceny schemes.
Answer: Cash larceny, which involves the theft of an organization’s cash after it has been
recorded, can take place in any circumstance in which an employee has access to cash.
Several different types of cash larceny schemes were described in this chapter. Most of
these schemes involve larceny that either occurs at the point of sale, involves incoming
receivables payments, or targets the victim organization’s bank deposits. Within these
three groups, there were several unique methods that were identified based on the steps
taken to conceal the thefts. Employees generally conceal larceny at the point of sale by
stealing from another person’s cash register, stealing very small amounts over an
extended period, processing fraudulent reversing transactions, altering cash counts or
sales records, or destroying sales records. Larceny of receivables is generally concealed
through force balancing, fraudulent reversing entries, or record destruction. Cash
larceny from the deposit may be concealed by deposit lapping or by fraudulently
recording stolen funds as deposits in transit. Larceny also frequently occurs because
payment, he or she can eliminate the imbalance.
3-9 (Learning objective 3-9) How do fraudsters commit cash larceny from the bank
deposit?
Answer: Fraudsters steal all or part of the deposit and conceal the scheme by destroying
the bank statement, or by showing the deposits as “in transit.” This type of scheme is
usually effective when there is a poor internal control system over cash collections and
deposits, in which the same employee may be responsible for cash collections, preparing
deposit slips, making deposits, and reconciling bank statements. The fraudster may also
alter the deposit slip after it has been returned in the bank statement.
3-10 (Learning objectives 3-5, 3-7, and 3-10) What are some basic internal control
procedures to deter and detect cash larceny schemes?
Answer: The separation of duties related to cash receipts, deposits, and recording is a
basic internal control to deter and detect cash larceny schemes. This includes
segregation of authorization, recording, and custody functions for cash and related
transactions. Assignment rotation, mandatory vacations, surprise cash counts, and
physical security of cash can also assist in deterring and detecting cash larceny schemes.
Discussion Issues
3-1 (Learning objectives 3-1, 3-6, 3-8, and 3-9) Briefly describe some common types of
cash larceny schemes.
Answer: Cash larceny, which involves the theft of an organization’s cash after it has been
recorded, can take place in any circumstance in which an employee has access to cash.
Several different types of cash larceny schemes were described in this chapter. Most of
these schemes involve larceny that either occurs at the point of sale, involves incoming
receivables payments, or targets the victim organization’s bank deposits. Within these
three groups, there were several unique methods that were identified based on the steps
taken to conceal the thefts. Employees generally conceal larceny at the point of sale by
stealing from another person’s cash register, stealing very small amounts over an
extended period, processing fraudulent reversing transactions, altering cash counts or
sales records, or destroying sales records. Larceny of receivables is generally concealed
through force balancing, fraudulent reversing entries, or record destruction. Cash
larceny from the deposit may be concealed by deposit lapping or by fraudulently
recording stolen funds as deposits in transit. Larceny also frequently occurs because
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there is a breakdown of controls such that one person has solitary access to an
organization’s books and records. In these cases, it may not be necessary for the
perpetrator to use any concealment technique; he simply steals money without trying to
hide the crime.
3-2 (Learning objective 3-3) Why is it generally more difficult to detect skimming than
cash larceny?
Answer: The benefit of a skimming scheme is that the transaction is unrecorded and the
stolen funds are never entered on company books. This makes the skimming scheme
difficult to detect because sales records do not reflect the presence of the funds that have
been taken. In a larceny scheme, on the other hand, the funds that the perpetrator steals
are already reflected on the victim organization’s books. As a result, an imbalance
results between the sales records and cash on hand. This imbalance should be a signal
that alerts a victim organization to the theft.
3-3 (Learning objectives 3-2 and 3-3) In the case study of bank teller Laura Grove, what
type of fraud did she commit?
Answer: Laura perpetrated a cash larceny scheme. In order to classify the scheme, we
first look to the fact that she took cash, which means her scheme was a form of cash
misappropriation. To further classify the scheme, we look to the method by which she
took the cash. Remember, there are three categories of cash misappropriation:
fraudulent disbursements, skimming, and cash larceny. Laura Grove’s scheme involved
the physical misappropriation of cash without the use of fraudulent documents or forged
signatures. She made no attempt to record or justify the removal of cash as a legitimate
disbursement of funds. Therefore, her scheme could not have been a fraudulent
disbursement.
The only two other categories of cash misappropriation are skimming and cash
larceny. The difference between these two types of fraud lies in whether the stolen funds
had been recorded on the victim organization’s books at the time they were stolen. In this
case, the money Laura Grove stole had already been recorded on the bank’s books and
records; therefore the scheme must be classified as a cash larceny.
3-4 (Learning objective 3-5) What are the internal control weaknesses that failed to deter
and detect the fraud in Laura Grove’s case?
organization’s books and records. In these cases, it may not be necessary for the
perpetrator to use any concealment technique; he simply steals money without trying to
hide the crime.
3-2 (Learning objective 3-3) Why is it generally more difficult to detect skimming than
cash larceny?
Answer: The benefit of a skimming scheme is that the transaction is unrecorded and the
stolen funds are never entered on company books. This makes the skimming scheme
difficult to detect because sales records do not reflect the presence of the funds that have
been taken. In a larceny scheme, on the other hand, the funds that the perpetrator steals
are already reflected on the victim organization’s books. As a result, an imbalance
results between the sales records and cash on hand. This imbalance should be a signal
that alerts a victim organization to the theft.
3-3 (Learning objectives 3-2 and 3-3) In the case study of bank teller Laura Grove, what
type of fraud did she commit?
Answer: Laura perpetrated a cash larceny scheme. In order to classify the scheme, we
first look to the fact that she took cash, which means her scheme was a form of cash
misappropriation. To further classify the scheme, we look to the method by which she
took the cash. Remember, there are three categories of cash misappropriation:
fraudulent disbursements, skimming, and cash larceny. Laura Grove’s scheme involved
the physical misappropriation of cash without the use of fraudulent documents or forged
signatures. She made no attempt to record or justify the removal of cash as a legitimate
disbursement of funds. Therefore, her scheme could not have been a fraudulent
disbursement.
The only two other categories of cash misappropriation are skimming and cash
larceny. The difference between these two types of fraud lies in whether the stolen funds
had been recorded on the victim organization’s books at the time they were stolen. In this
case, the money Laura Grove stole had already been recorded on the bank’s books and
records; therefore the scheme must be classified as a cash larceny.
3-4 (Learning objective 3-5) What are the internal control weaknesses that failed to deter
and detect the fraud in Laura Grove’s case?
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Answer: Various weaknesses that may have contributed to the scheme include shutting off
the surveillance camera on the vault during nonbusiness hours, not maintaining the
security of the vault combination, not rotating employees periodically, and not checking
employees’ belongings when they left the bank.
3-5 (Learning objectives 3-6 and 3-7) Other than falsifying a company’s records of cash
receipts, how might an employee conceal larceny from a cash register?
Answer: An employee might discard or destroy cash register tapes. Missing or defaced
backup documentation should indicate a red flag for fraud. Altering the cash count for
his or her register is another way to conceal a fraud. Proper internal control procedures
would prohibit an employee from performing a reconciling cash count of his or her own
register.
3-6 (Learning objectives 3-10 and 3-11) What steps might an organization take to protect
outgoing bank deposits from cash larceny schemes?
Answer: One form of cash larceny is for an employee to steal from the bank deposits.
Usually, it is perpetrated by the employee who is in charge of making the deposit. Some
internal control procedures that might assist in the deterrence of such frauds are: (1)
separating the duties of receiving and opening of the mail and preparing the deposit slip,
(2) segregating the functions for taking deposits to the bank and recording the
transactions, (3) maintaining more than one copy of the deposit slip to be matched and
reconciled with the bank’s receipts of deposits, (4) examining the bank deposit slip for
alterations, and (5) reconciling the bank statement with the book balance by a person
who is not also involved with the custody function for cash.
3-7 (Learning objective 3-8) How is the larceny of receivables often detected?
Answer: Many times, receivables schemes involve skimming—the perpetrator steals the
payment but never records it. This type of scheme might be detected by the delay between
the time the payment is received and when it is posted to the books. Customer complaints
of incorrect account balances are often a clue to a receivables skimming scheme.
If the theft occurs after the payment has been recorded, then it is classified as
cash larceny. In order for an employee to succeed at a cash larceny scheme, she must be
able to hide the imbalances in the accounts caused by the fraud. Larceny of receivables is
generally concealed through force balancing, reversing entries, or destroying records.
Looking for inappropriate journal entries and examining supporting documentation may
help to uncover a larceny of receivables.
the surveillance camera on the vault during nonbusiness hours, not maintaining the
security of the vault combination, not rotating employees periodically, and not checking
employees’ belongings when they left the bank.
3-5 (Learning objectives 3-6 and 3-7) Other than falsifying a company’s records of cash
receipts, how might an employee conceal larceny from a cash register?
Answer: An employee might discard or destroy cash register tapes. Missing or defaced
backup documentation should indicate a red flag for fraud. Altering the cash count for
his or her register is another way to conceal a fraud. Proper internal control procedures
would prohibit an employee from performing a reconciling cash count of his or her own
register.
3-6 (Learning objectives 3-10 and 3-11) What steps might an organization take to protect
outgoing bank deposits from cash larceny schemes?
Answer: One form of cash larceny is for an employee to steal from the bank deposits.
Usually, it is perpetrated by the employee who is in charge of making the deposit. Some
internal control procedures that might assist in the deterrence of such frauds are: (1)
separating the duties of receiving and opening of the mail and preparing the deposit slip,
(2) segregating the functions for taking deposits to the bank and recording the
transactions, (3) maintaining more than one copy of the deposit slip to be matched and
reconciled with the bank’s receipts of deposits, (4) examining the bank deposit slip for
alterations, and (5) reconciling the bank statement with the book balance by a person
who is not also involved with the custody function for cash.
3-7 (Learning objective 3-8) How is the larceny of receivables often detected?
Answer: Many times, receivables schemes involve skimming—the perpetrator steals the
payment but never records it. This type of scheme might be detected by the delay between
the time the payment is received and when it is posted to the books. Customer complaints
of incorrect account balances are often a clue to a receivables skimming scheme.
If the theft occurs after the payment has been recorded, then it is classified as
cash larceny. In order for an employee to succeed at a cash larceny scheme, she must be
able to hide the imbalances in the accounts caused by the fraud. Larceny of receivables is
generally concealed through force balancing, reversing entries, or destroying records.
Looking for inappropriate journal entries and examining supporting documentation may
help to uncover a larceny of receivables.
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Subject
Auditing