Principles of Fraud Examination 4th Edition Solution Manual

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ANSWERS TO EXERCISESChapter 1Review Questions1-1(Learning objective 1-1) What is fraud examination?Answer:Fraud examinationis a process for resolving allegations of fraud from inceptionto disposition. Fraud examinations involve not only financial analysis, but alsointerviewing witnesses, taking statements, writing reports, testifying to findings, andassisting in the prevention and detection of fraud.1-2(Learning objective 1-2) What is the fraud theoryapproach?Answer:The fraud theory approachis the methodology used for resolving allegationsoffraudby developing a worst-case scenario of what could haveoccurred, then attemptingto confirm or refute thattheory.1-3(Learning objective 1-3) Occupational fraud and abuseincludes any personalenrichment that results from misuse ormisapplication of the employing organization’sresources orassets. There are four key elements to this activity. Whatare they?Answer:The four key elements to occupational fraudabuse are that it(1) is clandestine,(2) violates the employee’s fiduciary duties to the organization, (3) is committed for thepurpose of direct orindirect financial benefit to the employee, and (4) costs theemploying organization assets, revenues, or reserves.1-4(Learning objective 1-4) Under the common law, fraud generally consists of fourelements, all of which must bepresent. 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 falsestatement by the victim, and (4) damages as a result.1-5(Learning objectives 1-4 and 1-5) What is the difference between occupational fraudand occupational abuse? Giveexamples.Answer:Occupational fraud tends to be more costly and less common than abuse.Occupational fraud consistsof such actions as asset misappropriations, corruption, andfraudulent financial statements. Occupational abuse consistsof petty offenses such astakingextended lunch periods or breaks, showing uplate forwork or leaving early, anddoing slow or sloppy work.

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1-6(Learning objective 1-7) Edwin H. Sutherland, acriminologist, coined the phrase“white-collar crime.” What did he mean by this term? How has the meaning of thisphrase changed over time?Answer:Sutherland coined the term“white-collar crime”todescribecriminal acts ofcorporations and individuals acting in their corporate capacity (e.g., crime in theexecutive suite). Over time, the term has come toencompassalmost any financial oreconomic crime, from the mailroom to the boardroom.1-7(Learning objective 1-7) Sutherland developed what is known as the “theory ofdifferential association.” What is the principal tenet of his theory?Answer:The theory of differential association’s principal tenet is that crime is learned.Sutherlandbelieved that this learning typically occurred in intimate personal groups.1-8(Learning objective 1-8) Cressey interviewed nearly 200 embezzlers in order todevelop his theory on the causation of fraud. As a result of his research, what wasCressey’s finalhypothesis?Answer:“Trusted persons become trust violators when they conceive of themselves ashaving a financial problem which is non-shareable, are aware this problem can besecretly resolved by violation of the position of financial trust, and are able to apply totheir own conduct in that situation verbalizations which enable them to adjust theirconceptions of themselves as trusted persons with their conceptions of themselves asusers of the entrusted property.”1-9(Learning objective 1-9) Cressey believed thatnon-shareable problems provided themotivation foremployees 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, aloss of status.1-10(Learning objective 1-9) Cressey divided thenon-shareable problems of thesubjects in his research into six different subtypes. What are they?Answer:Thesubtypesare (1) violation of ascribed obligations, (2) problems resultingfrom personal failure, (3) businessreversals, (4) physical isolation, (5) status gaining,and(6) employer–employee relations.

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1-11(Learning objective 1-11) Albrecht concluded that there were three factors that ledto occupational fraud. What are they?Answer:Albrecht’s list is very similar to the fraudtriangle. The three factors heidentified are (1) situational pressures, (2) opportunities, and (3) personal integrity.1-12(Learning objective 1-12) What factor did Hollinger and Clark identify as theprimary cause of employee deviance?Answer:The research of Hollinger and Clark stronglysuggeststhatjob dissatisfactionamong employees—across all age groups but especially younger workers—is the mostlikely cause of counterproductive or illegal behavior in theworkplace.1-13(Learning objective 1-13) The2011GlobalFraud Surveycovered a number offactors that are related tooccupational fraud. List these factors.Answer:The2011Global Fraud Surveygathered data on occupational fraud and abuserelating to (1) the cost of fraud and abuse, (2) position, gender, tenure, and criminalhistory of the perpetrator, (3) size of the victim organization, (4) actions taken againstoccupational fraudsters by their victims, (5) methods by which occupational frauds weredetected, (6) commonness of schemes, and (7) costs associated with various schemes.Discussion Issues1-1(Learning objective 1-1) Howdoes “fraud examination” differ from “forensicaccounting”?Answer:Fraud examination is a process used to resolveallegations of fraud frominception to disposition. Forensicaccounting is any accounting work done in anticipationoflitigation.1-2(Learning objective 1-2) There are several steps involved in the fraud theoryapproach. 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 thetheory, revising it or amending it as necessary, then proving the theorythrough additional investigative work.1-3(Learning objectives 1-3 through 1-6) How doesoccupational fraud and abuse differfrom other kinds of fraud? Give examples of other fraud types.

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Answer:Typically, any crime that uses deceit as its principal modus operandi isconsidered fraud. Occupational fraudinvolves those frauds that are committed againstorganizations by individuals who work for those organizations. Other fraud types includebut are not limited to: insurance frauds committed by customers andpolicyholders,Internet frauds and scams perpetrated byindividuals, frauds against governmentalorganizationscommitted by companies and individuals, frauds against banks committedby 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 thedetection or deterrence of fraud? How does it differ from the study of accounting orauditing?Answer:Criminalscommit frauds. Accounting relates to the classification of assets,liabilities, income, expenses, and equity. Auditing involves the verification of books andrecords. 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 isthat books don’t commit fraud, people do. Understanding both how and why fraud iscommitted helps us better detect and deter it.1-5(Learning objective 1-7) Sutherland’s contribution to criminology, in addition togiving us the term “white-collar crime,” involved developing the theory of differential-association. What are the implications of this theory withrespect tooccupational fraud?Answer:Sutherland’s main point was that the tendency to commit crime is learned, notinherited. He believed thatcriminals learned both the techniques of committing crimesand the value systems of criminals in small, intimate groups. This explains, in part, whyprisoners frequently return to crime after they are let out of confinement. Whilebehindbars, they talk to other inmates and learn the specifics of how to better commit theircrimes. 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 workingwith books, records, inventory, and other assets. They frequently hear about otheremployees who were not successful in their crimes. Rather than beingdiscouraged bysomeone being caught, the potential criminal often learns a different lesson: that themethod the other person used to commit fraud was faulty and that a different one must bedevised in order to succeed. They also learn the valuesystems that some businesses have:Profit is everything, and the end justifies the means. Such values obviously send thewrongmessage.

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1-6(Learning objective 1-8) Cressey’s “fraud triangle” states that three factors—non-shareable financial need, perceivedopportunity, and rationalization—are present in casesofoccupational fraud. Which of these three factors, if any, is the mostimportant incausing executives, managers, andemployees to commit occupational fraud?Answer:All three are equally important. A fire cannot exist without fuel, oxygen, andheat; a fraud cannot exist without motive, opportunity, and rationalization. If a personhasunlimited motivebutno opportunity, he or she cannot commit fraud. If a person hasopportunity but doesn’t need the money, the fraud is unlikely to occur. Should anindividual have both motive and opportunity but cannot salve his or her consciencethrough rationalization, the crime will most likely not becommitted.1-7(Learning objectives 1-8 and 1-9) Cressey described a number of non-shareablefinancial problems that he uncovered during his research. Which of these, if any, apply tomodern-day executives who are responsible for large financialstatement frauds? In the50-plus years since Cressey did his study, are the factors he described still valid? Why orwhy not?Answer:Three non-shareable financial problems seem to be at the root of today’sfinancial frauds: violation of ascribed obligations, problems resulting from personalfailure, 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, someexecutives are too ashamed to admit that they don’t have the talent orwherewithal to steer an enterprise through rougheconomic conditions. And sometimes,business reversals—fromloss of a major client or contract, recessions, high costs of-capital, and the like—are at the root of these so-callednon-shareablefinancial problems.One could argue that these factors are as valid today as they were over half acentury ago. What motivates people to act changes little over time, although the methodsthat 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 commitoccupational fraud. How are Albrecht’s conclusions similar to Cressey’s? How are they-different?Answer:Cressey’s three factors were a non-shareablefinancial need, perceivedopportunity, and rationalization.Albrecht’s consisted of financial pressure, perceived-opportunity, and personal integrity. One of the factors,perceived opportunity, was

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namedby both researchers. Cressey’s non-shareable financial need is similar toAlbrecht’s financial pressure;however, Cressey’s is more specific. Nearly everyonesuffers financial pressures of some kind, but most do not turn to fraud in order toalleviate them. The ability to rationalize illegalconduct and personal integrity could beviewed as one and the same. However, personal integrity is difficult to measure, whilespecific rationalizations are easier to identify.1-9(Learning objective 1-13)TheACFE’s2011GlobalFraud Surveyfound, amongother things, that the frauds committed by women had smaller median losses than thoseby men.What are some possible explanations for this finding?Answer:The sizes of losses due to occupational fraud arealmost always determined bythe employee’s access to assets. This explains why executives account for the largestlosses. Women, because of the so-called “glass ceiling” (where they are not promotedinto jobs equal to their male counterparts’), typically occupy lower-level positions.Chapter 2Review Questions2-1(Learning objective 2-1) How is “skimming” defined?Answer:Skimming is the theft of cash from a victim organization prior to its entry in theorganization’s accounting system.2-2(Learning objective 2-2) What are the two principalcategories of skimming?Answer:Skimming schemes can be subdivided based on whether they target sales orreceivables. The character of theincoming funds has an effect on how the frauds areconcealed, and concealment is the crucial element of most occupational fraud schemes.2-3(Learning objective 2-3) How do sales skimming schemes leave a victimorganization’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 ofthe day, his cash drawer will be short by $500—the amount of money that was stolen. Butbecause 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 receivedthrough the mail typically stolen?Answer:Checks are normally stolen when a singleemployee is in charge of opening themail and preparing the deposit. The employee simply removes the check from theincoming mail and forges the endorsement of the employer, then endorses it with his orher own name and cashes ordeposits 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 amountthan what the perpetrator collected from the customer.Typically, the perpetrator willunderstate a sale by recording a lower sales price for a particular item, or by recordingthe sale of fewer items of merchandise than the customer actually purchased.2-6(Learning objective 2-5) How is the cash registermanipulated to conceal skimming?Answer:There are two common methods. The first is to ring “no sale” on the registerand omit giving the customer a receipt for the purchase. The secondand less commonmethod is for the cashier to alter the tape itself so that it does not show the sale. This isimpossible to accomplish with cashregisters that also record the transactionelectronically.2-7(Learning objective 2-6) Give examples of skimming during nonbusiness hours andskimming of off-site sales.Answer:Certain categories of employees usually commit these schemes. Managers ofdepartment stores or employees opening or closing the store have been known to openearly or close late and skim all or part of the sales during those periods. Apartmentrental employees, parking lot attendants, andindependent salespeople are at a higherriskofskimmingfunds from off-site sales.2-8(Learning objective 2-8) What are the six principal methods used to concealreceivables skimming?Answer:The six concealment techniques identified in this chapter are: lapping, forcebalancing, stealing customerstatements, 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 receivablesskimming?Answer:Lapping is the crediting of one account through the abstraction of money fromanother account. Lapping customer payments is one of the most common methods ofconcealing receivables skimming. Suppose a company has threecustomers, A, B, and C.When A’s payment is received, the fraudster takes it for himself instead of posting it toA’saccount. When B’s check arrives, the fraudster posts itas a paymentto A’s account.Likewise, when C’s payment is received, the perpetrator applies it to B’s account. Thisprocess continues indefinitely until one of three things happens: (1) someone discoversthe scheme, (2) restitution is made to the accounts, or (3) some concealing entry is madeto adjust the accounts receivable balances.2-10(Learning objective 2-10) List four types of false entries a fraudster can make in thevictim organization’s books toconceal receivables skimming.Answer:The fraudster can lap the payments, as discussed in the previous question. Hecan also engage in force balancing by posting a payment to a customer’s account eventhough the payment was stolen. A third false entry that can bemadeis to fraudulentlywrite off a customer’s account asuncollectible. A fourth technique is to credit thetargeted account with a fraudulent “discount” in the amount of the stolen funds. Also,some fraudsters conceal receivables skimming by debitingexisting or fictitious accountsreceivable.Discussion Issues2-1(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 nodirect audit trail to uncover; the proof of the fraud must be determined by indirectmethods, such as ratio analysis or other comparisons.2-2(Learning objective 2-3) In the case study of Brian Lee, the plastic surgeon, whatkind of skimming scheme did hecommit?Answer:Dr. Lee committed a sales (revenue) skimming scheme. In this fraud, Dr. Lee’sclinic was a partnership with several other doctors,and all of the revenue derived fromhis services was supposed to go to the partnership. Because of a lack of controls andperiodic reconciliations by the clinic, Dr. Lee simply instructed his patients to pay himdirectly. 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 cashregister, what is one of the first things you would check?Answer:The cash register tapeis one of the first things you should check. In a typicalcash register skimming scheme, the crooked employee will ring up “no sale” on theregister 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 couldmean 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 adifferent city than where he lives has discovered that the apartment manager has beenskimming rental receipts, which are usually paid by check. The manager endorsed thechecks with the apartment rental stamp, thenendorsed her own name and deposited theproceeds into her own checking account. Because of the size of the operation, hiring aseparate employee to keep the books is not practical. How could a scheme like this beprevented in the future?Answer:Two simple, separate control measures might help prevent such futureoccurrences.Although it might not be practical for the owner to reconcile the rentalreceipts himselfsincehelives in a different city,he could obtain a restrictiveendorsement stamps that states“for deposit only.” Second, the owner could have rentalpayments 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 mosteffective control to preventreceivables skimming?Answer:In almost all cases of receivables skimming, theperson handling the cash andthe person keeping the booksareone and the same. An employee who opens incomingmail or handles cash should not be permitted to post thetransactions.2-6(Learning objectives 2-3 and 2-7) In many casesinvolving skimming, employeessteal checks from theincoming mail. What are some of the controls that can prevent suchoccurrences?Answer:Here are some of the basic controls over incoming checks:•The person opening the mail should be independent of the cashier, accountsreceivable clerk, or employees who areauthorized to initiate or post journal entries.•Unopened mail should not be delivered to employees having access to accountingrecords.

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•The employee who opens the mail should (1) placerestrictive endorsements on theincoming checks; (2) prepare a list of checks received; (3) forward all remittances tothe person responsible for preparing and making the bankdeposit; and (4) forwardthe list of checks to a person who can checktosee 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 thechief financial officer for abeverage company in Florida, how did he conceal hisskimming scheme? How could the scheme have been prevented ordiscovered?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 (cashsales) and office deposits (accounts receivable). The route salespeople prepared theirown deposit slips showing the cash andcurrency collected. The office personnel listedandaccounted for the checks received through the mail. Winkler removed currency fromthe 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 thedeposit slips—Winkler did that. As a result, he would ensure that the bank deposits agreed with theamount of money going into the bank.Tocover his tracks with the credit customers, Winkler would lap payments made byone customer to cover thefts from another customer. He would also give unauthorizeddiscounts to credit customers. When Winkler was fired for other reasons, he made ageneral ledger adjustmentof over $300,000 in a vainattempt to cover the shortages.There were many clues: The internal control deficiencies were glaring. All of thecash made a stop at Winkler’s desk on its way to the bank. Had there been adequatedivision ofresponsibilities, Winkler’s scheme would have been much more difficult toaccomplish. There were excessive falsediscounts to customers. The cost of sales wouldhave been out of linewithsales. And, like so many other fraudsters, Winkler lived beyondhis means. Had his fellow employees been properly educated about fraud, they wouldhave easilyseen the factthatWinklerwas driving a $75,000 caras a red flag.Also, hadthey been to his home, they would have noticed that their chief financial officer lived inan excessively expensive residence.Chapter3Review Questions3-1(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 withoutthe consent, and against the will, of the employer. Cash larceny schemes involve the theftof money that has already appeared on the victim company’s books.3-2(Learning objective 3-2) How do cashlarceny schemes differ from fraudulentdisbursements?Answer:Cash larceny schemes generally target receipts, not disbursements.Furthermore, larceny schemes usually involve the physical misappropriation of cash bythe perpetrator. The method of extraction—for instance, a perpetrator putting cash in hispocket—is itself improper. Fraudulentdisbursements, on the other hand, typically rely onthesubmission of phony documents or the forging of signatures in order to make afraudulent distribution of funds appear to be legitimate. The manner by which funds aredisbursed is the same as in anylegitimate disbursement, but the purpose of thedistribution is fraudulent.3-3(Learning objective 3-3) What is the difference between cash larceny and skimming?Answer:Both cash larceny and cash skimming schemesinvolve theft of the victimcompany’s funds. However, cash larceny involvestheremoval of money after it has beenrecorded in the company’s books, whereasskimming involves the removal of cash beforethe funds appear on the books. In other words, cash larceny is an on-book fraud, whereasskimming is an off-book fraud.3-4(Learning objective 3-4) Where do cash larceny schemes rank among cashmisappropriations in terms of frequency? In terms of median loss?Answer:Inthe2011Global Fraud Survey, cash larceny schemes wereless common thanboth skimming and fraudulent disbursements schemes.This is to be expected,ascashlarceny is an on-book form of fraud that leaves an imbalance on the victim organization’sbooks. This makes cash larceny more difficult to conceal than other forms of cashmisappropriation.The median loss for cash larceny schemes was greater than that forskimming schemes, but lower than that for fraudulent disbursements schemes.3-5(Learning objective 3-5) What are the main weaknesses in an internal control systemthat permit fraudsters theopportunity to commit cash larceny schemes?Answer:Cash larceny schemes can take place under anycircumstances in which anemployee has access to cash; therefore,regular supervision and surveillance controlsmay 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 larcenyschemes to occur.3-6(Learning objective 3-6) What are the five methodsdiscussed in this chapter that areused 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 wereidentified as being used to conceallarceny at the point of sale. The first was thefts fromotherregisters, in which an employee steals cash from anotherperson’s cash register.This does not conceal the crime, but it may help conceal the perpetrator’s identity. Thesecond method was death by a thousand cuts, in which an employeerepeatedly stealsvery small amounts of cash over an extended period of time, hoping that the thefts aresmall enough to avoidtriggeringan investigation. The third method is the use ofreversing transactions. After the perpetrator has stolen cash, he processes fraudulentrefunds or voids sales in order to bring sales records back into balance with cash onhand. The fourth method is to alter cash counts or cash register tapes. Totals aremisreported to create a fictitious balance between cash on hand and sales. The fifthmethod is to destroy sales records, which makes it difficult for the victim organization todiscover an imbalance caused by larceny.3-7(Learning objective 3-8) How do employees commit cash larceny of incomingreceivables? How are the schemesconcealed?Answer:Fraudsters may post the customer’s payment to the accounting system but stealthe cash, which causes animbalance in the cash account. This imbalance can beconcealed if the perpetrator has control over the recording function for ledger accounts.The fraudster makesunsubstantiated entries, which produce fictitious balances. Otherways to conceal cash larceny include using reversing transactions,creatingunauthorizeddiscounts, charging the theft to bad debts, or adjustingthe 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 cashlarceny?Answer:Force balancing involves the making of unsupported entries in anorganization’s books and records to produce afictitious balance. For example, if anemployee steals anincoming receivables payment after it has been posted to theappropriate customer account, this will create a shortage in the cash account because theamount of receipts posted willexceed 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 stolenpayment, he or she can eliminate theimbalance.3-9(Learning objective 3-9) How do fraudsters commit cash larceny from the bankdeposit?Answer:Fraudsterssteal all or part of the deposit andconceal the scheme by destroyingthe bank statement, orbyshowing thedeposits as “in transit.” This type of scheme isusually effective when there is a poor internal control system over cash collections anddeposits, in which the sameemployee may be responsible for cash collections, preparingdeposit slips, making deposits, and reconciling bankstatements. The fraudster may alsoalter 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 controlprocedures to deter and detect cashlarceny schemes?Answer:The separation of duties related to cash receipts, deposits, and recordingis abasic internal control to deter and detect cash larceny schemes. Thisincludessegregation of authorization, recording, and custody functions for cash and relatedtransactions. Assignmentrotation, mandatory vacations, surprise cash counts, andphysical security of cash can also assist in deterring anddetectingcashlarceny schemes.Discussion Issues3-1(Learning objectives 3-1, 3-6, 3-8, and 3-9) Brieflydescribe some common types ofcash larceny schemes.Answer:Cash larceny, which involves the theft of anorganization’s cash after it has beenrecorded, can take place in anycircumstance in which an employee has access to cash.Several different types of cash larceny schemes were described in this chapter. Most ofthese schemes involve larceny thateither occurs at the point of sale, involves incomingreceivables payments, or targets the victim organization’s bank deposits. Within thesethree groups, there were several unique methods that were identifiedbased on the stepstaken toconceal the thefts. Employees generally conceal larceny at the point of sale bystealing from another person’s cash register, stealing very small amounts over anextended period,processing fraudulent reversing transactions, altering cash counts orsales records, or destroying sales records. Larceny of receivables is generally concealedthrough force balancing, fraudulent reversingentries, or record destruction. Cashlarceny from the deposit may be concealed by deposit lapping or by fraudulentlyrecording stolen funds as deposits in transit. Larceny alsofrequentlyoccurs because

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there is a breakdown of controls such that one person has solitary access to anorganization’s books and records. In these cases, it may not be necessary for theperpetrator to use any concealmenttechnique; he simply steals money without trying tohide the crime.3-2(Learning objective 3-3) Why is it generally moredifficult to detect skimming thancash larceny?Answer:The benefit of a skimming scheme is that thetransaction is unrecorded and thestolen funds are neverentered on company books. This makes the skimming schemedifficult to detect because sales records do not reflect thepresence of the funds that havebeen taken. In a larceny scheme, on the other hand, the funds that the perpetrator stealsare already reflected on the victim organization’s books. As a result, an imbalanceresultsbetween the sales records and cash on hand. This imbalance should be a signalthat 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, whattype of fraud did she commit?Answer:Laura perpetrated a cash larceny scheme. In order to classify the scheme, wefirst look to the fact that she took cash, which means her scheme was a form of cashmisappropriation. To further classify the scheme, we look to the method by which shetook the cash. Remember, there are three categories of cash misappropriation:fraudulent disbursements, skimming, and cash larceny. Laura Grove’s scheme involvedthe physical misappropriation of cash without the use of fraudulentdocuments or forgedsignatures. She made no attempt to record or justify the removal of cash as a legitimatedisbursement of funds. Therefore, her scheme could not have been a fraudulentdisbursement.The only two other categories of cash misappropriation are skimming and cashlarceny. The difference between these two types of fraud lies in whether the stolen fundshad been recorded on the victim organization’s books at the time they were stolen. In thiscase, the money Laura Grove stole hadalready been recorded on the bank’s books andrecords;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 deterand detect the fraud in Laura Grove’s case?

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Answer:Various weaknesses that may have contributed to the scheme include shutting offthe surveillance camera on the vault during nonbusiness hours, not maintaining thesecurity of the vault combination, not rotating employees periodically, and not checkingemployees’ belongings when they left the bank.3-5(Learning objectives 3-6 and 3-7) Other than falsifying a company’s records of cashreceipts, how might an employee conceal larceny from a cash register?Answer:An employee might discard or destroy cash register tapes. Missing or defacedbackup documentation shouldindicate a red flag for fraud. Altering the cash count forhis or herregister is another way to conceal a fraud. Proper internal control procedureswould prohibit an employee fromperforming a reconciling cash count ofhis or herownregister.3-6(Learning objectives 3-10 and 3-11) What steps might an organization take to protectoutgoing bank deposits from cash larceny schemes?Answer:Oneform 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. Someinternal control procedures that might assist in the deterrence of such frauds are: (1)separatingthedutiesofreceiving and opening of the mail and preparing the deposit slip,(2)segregating the functions for taking deposits to the bank and recording thetransactions, (3) maintaining more than one copy of the deposit slip to be matched andreconciled with the bank’s receipts of deposits, (4) examining the bank deposit slip foralterations, and (5) reconciling the bank statement with the book balance by a personwho 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,receivablesschemes involve skimming—the perpetrator steals thepayment but never records it. This type of scheme might be detected by the delay betweenthe time the payment is received and when it is posted to the books.Customer complaintsof incorrect account balances are often a clue to areceivablesskimming scheme.If the theft occurs after the payment has been recorded, then it is classified ascash larceny. In order for an employee to succeed at a cash larceny scheme, she must beable to hide the imbalances in the accounts caused by the fraud. Larceny ofreceivables isgenerally concealed through forcebalancing, reversing entries, or destroying records.Looking forinappropriate journal entries and examining supporting documentation mayhelp to uncover a larceny of receivables.

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