Detection of Cash Larceny

Cash larceny schemes are easier to detect than skimming schemes. Cash larceny involves the theft of cash that appears on a company’s books or records, whether it’s theft of cash in a cash register or theft of cash from a deposit. Cash larceny schemes are more difficult to get away with because they leave an audit trail.

Receipt Recording

In-depth analysis of the cash receipts and recording process is the key to detecting a cash larceny scheme. Areas of analysis might include:

  • Mail and register receipt points
  • Journalising and recording of the receipts
  • Security of the cash from receipt to deposit

Control Objectives

In analysing the cash receipt process, it is important to meet the following control objectives:

  • Cash receipts must be complete. Each day’s receipts must be promptly collected and deposited in full.
  • Each receivable transaction recorded must be legitimate and have supporting documentation.
  • All information included in the transaction must be correctly verified as to amount, date, account coding, and descriptions.
  • The cash must be safeguarded while in the company’s physical possession.
  • There must be appropriate personnel responsible for overseeing cash control processes.
  • Cash register log totals should be reconciled to the amount of cash in the drawer.
  • An independent listing of cash receipts should be prepared before the receipts are submitted to the cashier or accounts receivable bookkeeper.
  • An independent person should verify the listing against the deposit slips.
  • Authenticated deposit slips should be retained and reconciled to the corresponding amounts in the cash receipts records.
  • The bank deposit should be made by someone other than the cashier or the accounts receivable clerk. A person independent of the cash receipts and accounts receivable functions should compare entries to the cash receipts journal with:

–   Authenticated bank deposit slips

–   Deposit per the bank statements

  • Areas where physical handling of cash takes place should be reasonably safeguarded.
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Analytical Review

  • Analysing the relationship among sales, cost of sales, and the returns and allowances can detect inappropriate refunds and discounts. If a large cash fraud is suspected, a thorough review of these accounts might enlighten the fraud examiner as to the magnitude of the suspected fraud.
  • An analysis of refunds and 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 will cause a corresponding entry to an inventory account.
  • There should be a linear relationship between sales and returns and allowances over a relevant range. Any change in this relationship might point to a fraud scheme unless there is another valid explanation, such as a change in the manufacturing process, change in product line, or change in price.

Detection at the Register

  • As cash is received, whether at a register or through the mail, it is important to ensure that the employees responsible for completing these important tasks are informed of their responsibility and properly supervised.
  • Access to the register must be closely monitored and access codes must be kept secure.
  • All employees should have unique access codes to the cash registers. The time periods that each access code is used should be checked against employee work schedules to ensure an employee’s access code was not used in his absence.
  • An employee other than the register worker should be responsible for preparing register count sheets and reconciling them with register totals.
  • Popular concealment methods must be watched for. These methods, discussed earlier, include cheques for cash, reversing transactions, register log destruction or alteration, and sales cash counts.
  • Complete register documentation and cash must be delivered to the appropriate personnel in a timely manner.
  • Cash thefts are sometimes revealed by customers who have either paid money on an account and have not received credit or, in some cases, have noticed that the credit they have been given does not agree with the payment they have made. Complaints and inquiries are also received frequently from banks.
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Cash Account Analysis

Cash larceny can be detected by reviewing and analysing 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 log, then he might resort to making a journal entry directly to cash. In general (except in financial institutions), there are very few instances in everyday business activity where an independent 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. Suspect entries will generally credit the cash account and correspondingly debit various other accounts such as a sales contra account or bad debt expenses.

Prevention of Cash Larceny

Separation of Duties

The primary prevention of cash larceny is separation of duties. Whenever one individual has control over the entire accounting transaction (e.g., authorisation, recording, and custody), the opportunity is present for cash fraud. Ideally, each of the following duties and responsibilities should be segregated:

  • Cash receipts
  • Cash counts
  • Bank deposits
  • Deposit receipt reconciliation
  • Bank reconciliations
  • Posting of deposits
  • Cash disbursements

If any one person has the authority to collect the cash, deposit the receipts, record that collection, and disburse company funds, the risk of fraud is high.

Assignment Rotation and Mandatory Holidays

Many internal fraud schemes are continuous in nature and require ongoing efforts by the employee to conceal defalcations. Mandatory holidays are an excellent method of detecting cash fraud. If mandatory holidays are within the company’s policies, it is important that during the employee’s absence, that employee’s normal workload be performed by another individual. The purpose of mandatory holidays is lost if the work is allowed to remain undone during the employee’s time off.

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Surprise Cash Counts and Procedure Supervision

Surprise cash counts and supervisory observations are a useful fraud prevention method if properly used. It is important that employees know that cash will be counted on a periodic and unscheduled basis. These surprise counts must be made at all steps of the process from receiving the cheque to deposit.

Physical Security of Cash

  • Ensure proper segregation of duties of key personnel.
  • Review the cheque and cash composition of the daily bank deposit during unannounced cash counts and during substantive audit tests of cash receipts.
  • Review the entity’s records of the numerical series of printed prenumbered receipts, and verify that these receipts are used sequentially (including voided documents).
  • Review the timeliness of deposits from locations to the central treasurer function.
  • Observe locations’ cash receipting operations.
  • Prepare and review a schedule of all cash receipting functions from a review of revenue reports, from cash receipt forms at the central treasurer function, and from discussion with knowledgeable employees.
  • Prepare and analyse an inventory of all imprest and change funds by purpose, amount, custodian, date, and location.
  • Audit all revenue sources on a cycle.
  • Periodically use comparative analytical reviews to determine which functions have unfavourable trends.
  • Determine reason(s) why revenue has changed from previous reporting periods.
  • Confirm responses obtained from managers by using alternative records or through substantive audit tests.
  • Adhere to a communicated policy of unannounced cash counts.

Cash Larceny – Part 3

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