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Unformatted text preview: Chapter 06 - Employee Fraud and the Audit of Cash CHAPTER 6 Employee Fraud and the Audit of Cash LEARNING OBJECTIVES Review Checkpoints Exercises, Problems, and Simulations 1. Define and explain the differences among several kinds of employee frauds that might occur in an organization. 1, 2, 3 2. List and explain some conditions that can lead to frauds. 4, 5, 6, 7 3. Describe ways and means for preventing employee frauds. 8 46 4. Describe the controls over the receipt and disbursement of cash. 9, 10, 11, 12 43, 44, 45 5. Design and perform substantive audit procedures for the audit of cash. 13, 14, 15, 16, 17, 18 47, 48, 49, 50, 57, 59, 60, 61 6. Discuss actual cash fraud cases and describe how the schemes were uncovered. 19, 20 53, 55, 56, 58 7. Describe some extended procedures for detecting employee fraud schemes involving cash. 21, 22, 23 51, 52, 54 6-1 Chapter 06 - Employee Fraud and the Audit of Cash SOLUTIONS FOR REVIEW CHECKPOINTS 6.1 Employee fraud is the use of fraudulent means to take money or other property from an employer. It consists of three phases: (1) the fraudulent act, (2) the conversion of the money or property to the fraudster’s use and (3) the cover up. Embezzlement is a type of fraud involving employees or nonemployees wrongfully taking money or property entrusted to their care, custody, and control, often accompanied by false accounting entries and other forms of lying and cover up. Larceny is simple theft of an employer’s property that is not entrusted to an employee’s care, custody or control. Defalcation is another name for employee fraud and embezzlement. 6.2 Fraud perpetrators look like other people, hence the difficulty in spotting them easily. However, they sometimes exhibit behavioral red flags of odd habits. 6.3 (1) If the employees cannot be identified, maybe they do not exist. The names are odd. All the first and last names begin with the same letter. (2) If Eloise Garfunkle is a company employee, somehow she cashed a check payable to a supplier. Maybe she is related to the supplier, or maybe she intercepted the check before it reached the supplier. (3) Somebody is working on holidays! These dates are normal workdays off for most businesses: New Year’s Day, Memorial day, Independence day, Labor day, Thanksgiving day, and Christmas day. (Would students have been able to identify holidays like memorial day and labor day if the other more obvious ones had not been listed?) Egocentric Motivations • My father was wealthy, and I need to be wealthy too. • My friends admire cars, and I need to have an expensive one. Ideological motivations • The company sells tobacco and alcohol, and doesn’t deserve to make a profit....
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- Balance Sheet, employee fraud, Audit of Cash