FRAUDULENT DISBURSEMENTS

Question 1

There are two basic register disbursements schemes:

Answer 1

false refunds and false voids

Question 2

Fictitious Refunds

Answer 2

In a fictitious refund scheme, an employee processes a transaction as if a customer were
returning merchandise, even though there is no actual return

Question 3

Overstated Refunds

Answer 3

Rather than create an entirely fictitious refund, some employees merely overstate the amount
of a legitimate refund and steal the excess money.

Question 4

Credit Card Refunds

Answer 4

Some dishonest employees process false refunds on credit card sales in lieu of processing a normal cash transaction.
One benefit of the credit card method is that the perpetrator does not have to physically take
cash from the register and carry it out of the store

Question 5

False Voids

Answer 5

With the customer’s copy of the receipt in hand, the culprit rings a voided sale. Whatever money the customer paid for the item is removed from the register as though it is being returned to a customer. The copy of the customer’s receipt is attached to the void slip to verify the authenticity of the transaction.

Question 6

Concealing Register Disbursement Schemes

Answer 6

keep the sizes of the disbursements low
destroy all records of the transaction
conceal inventory shrinkage

Question 7

Fictitious refunds or voided sales can often be detected when

Answer 7

• closely examining the documentation submitted with the cash receipts
• One detection method is to evaluate the refunds or discounts given by each cashier or salesperson. This analysis may point out that a single employee or group of employees has a higher incidence of refunds or discounts than others. Further examination is then necessary to determine if the refunds are appropriate and properly documented.
• Signs in the register area asking customers to ask for and examine their receipts employ the customer as part of the internal control system. This helps ensure that the cashier or salesperson is properly accounting for the sale and prevents employees from using customer receipts as support for false void or refunds
• Random service calls to customers who have returned merchandise or voided sales can be used to verify the legitimacy of transactions.

Question 8

There should be __ between sales and returns and allowances over a relevant range

Answer 8

a linear relationship

Question 9

Register Disbursement Scheme Red Flags

Answer 9

• Inappropriate employee segregation of duties. For example, register counting and reconciling should not be done by the cashier.
• Cashiers, rather than supervisors, have access to the control keys that are necessary for
refunds and voids.
• Register employee has authority to void own transactions.
• Register refunds are not methodically reviewed.
• Multiple cashiers operate from a single cash drawer without separate access codes.
• Personal cheques from cashier found in register.
• Voided transactions are not properly documented or not approved by a supervisor.
• Voided cash receipt forms (manual systems) or supporting documents for voided transactions (cash register systems) are not retained on file.
• Missing or obviously altered register tapes.
• Gaps in the sequence of transactions on register tape.
• An inordinate number of refunds, voids, or no-sales on register tape.
• Inventory totals appear forced.
• Multiple refunds or voids for amounts just under the review limit.

Question 10

Prevention of Register Disbursement Schemes

Answer 10

• Review the segregation of duties of key employees who staff the register as well as the
duties of their supervisors.
• As cash is received it is important to ensure that the employees responsible for completing these important tasks are informed of their responsibilities and properly supervised.
• An employee other than the register worker should be responsible for preparing register
count sheets and agreeing them to register totals.
• 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 paid money on an account
and have not received credit, or in some cases, who have been credited for an amount that does not agree with the payment they have made. Complaints and inquiries are also received frequently from banks.
• Access to the register must be closely monitored and access codes must be kept secure.
• Quantity of refunds should be analysed to detect multiple small refunds.
• Communicate and adhere to company policy of performing unannounced cash counts.
• Maintain the presence of a manager or supervisor near the area of the cash register as a
deterrent to theft.
• Review supporting documents for voided and refunded transactions for propriety (i.e.,legitimacy and approvals).
• Review the numerical sequence and completeness of cash register tapes.

Question 11

Cheque Tampering Schemes

Answer 11

In these schemes the perpetrator takes physical control of a cheque and makes it payable to himself through one of several methods

Question 12

Forged Maker Schemes

Answer 12

cheque tampering scheme in which an employee

misappropriates a cheque and fraudulently affixes the signature of an authorised maker thereon

Question 13

To Whom Is the Cheque Made Payable?

Answer 13

TO THE PERPETRATOR
TO AN ACCOMPLICE
TO “CASH”
TO VENDORS

Question 14

Forging the Signature

Answer 14

FREE-HAND FORGERY
PHOTOCOPIED FORGERIES
AUTOMATIC CHEQUE-SIGNING INSTRUMENTS

Question 15

Forged endorsements are those cheque tampering schemes in which

Answer 15

an employee intercepts a company cheque intended to pay a third party and converts the cheque by endorsing it in the third party’s name.

Question 16

Altered Payee Schemes

Answer 16

This is a type of check tampering fraud in which an employee intercepts a company check intended for
a third party and alters the payee designation so that the check can be converted by the
employee or an accomplice

Question 17

Altering Checks Prepared by Others: Inserting a New Payee

Answer 17

The first is to insert the false payee’s name in place of the true payee’s
A more intricate method occurs when the perpetrator of the fraud enters the
accounts payable system and changes the names of payees

Question 18

Altering Checks Prepared by Others: ‘‘Tacking On’’

Answer 18

“tacking on” additional letters or words to the end of the real payee designation.

Question 19

Intercepting Cheques

Answer 19

EMPLOYEES INVOLVED IN DELIVERY OF CHEQUES
POOR CONTROL OF SIGNED CHEQUES
Theft of Returned Cheques
Re-Routing the Delivery of Cheques

Question 20

Altering Checks Prepared by the Fraudster: Erasable Ink

Answer 20

is to write or type the payee’s name (and possibly the amount) in erasable ink. After the check is signed by an authorized maker, the perpetrator retrieves the check, erases the payee’s name, and
inserts his own

Question 21

Altering Checks Prepared by the Fraudster: Blank Checks

Answer 21

e in which the perpetrator prepares a check, leaves the payee designation blank, and submits it to an authorized maker who signs the check and returns it to the employee

Question 22

Concealed Check Schemes

Answer 22

These are check tampering frauds in which an employee prepares a fraudulent check and submits it along with legitimate checks to an authorized
maker who signs it without a proper review

Question 23

An authorized maker scheme is a type of check tampering fraud

Answer 23

in which an employee with signature authority on a company account writes fraudulent checks for his own benefit and signs his own name as the maker

Question 24

Concealing Cheque Tampering Schemes

Answer 24

The Fraudster Reconciling the Bank Statement (remove the fraudulent cheques or doctor the bank statement or both; removes the fraudulent cheque from the stack of returned cheques and
destroys it; code it as “void” or to include no listing at all in the journal.)
Re-Alteration of Cheques (When the fraudulent cheques return with the bank statement, the employee erases his own name and re-enters the name of the proper payee)
Miscoding Fraudulent Cheques (write a cheque payable to himself but list a different person as the payee on the books or overstating the amounts of legitimate disbursements in the journal in order to absorb the cost of a fraudulent cheque.)
Re-Issuing Intercepted Cheques
Bogus Supporting Documents

Question 25

Detection of Cheque Tampering Schemes

Answer 25

Account Analysis Through Cut-Off Statements
Bank Reconciliations
Bank Confirmation

Question 26

From the reconciliations perform the following tests:

Answer 26

• Confirm the mathematical accuracy of the reconciliation.
• Examine the bank statement for possible alterations.
• Trace the balance on the statement back to the bank cut-off and bank confirmation statements.
• Foot the balance to the company’s ledger.
• Trace the deposits in transit to the bank cut-off statement to ensure recording in proper period.
• Examine cancelled cheques and compare to the list of outstanding cheques.
• Sample supporting documentation of cheques written for a material amount.
• Verify supporting documentation on outstanding cheques written for a material amount.
• Verify accuracy of nonoperational-cash or cash-equivalent accounts (CDs and other investment accounts). Analysis should include the verification of the institution holding the funds, interest rate, maturity date, beginning and ending balances, and current period activity. Book and bank balances should be compared and any accruals of interest
analysed.

Question 27

Cheque-Tampering Red Flags

Answer 27

• Voided cheques may indicate employees have embezzled cash and charged the embezzlement to expense accounts. When the expense is paid (from accounts payable), fraudulent cheques are marked and entered as void and removed from distribution points. An account-balancing journal entry is then made. The list of voided cheques should be verified against physical copies of the cheques. Bank statements should be reviewed to ensure that voided cheques have not been processed.
• Missing cheques may indicate lax control over the physical safekeeping of cheques. Stop
payments should be issued for all missing cheques.
• Cheques payable to employees, with the exception of regular payroll cheques, should be
closely scrutinised. Such an examination may indicate other schemes such as conflicts of
interest, fictitious vendors, or duplicate expense reimbursements.
• Altered endorsements or dual endorsements of returned cheques may indicate possible tampering.
• Returned cheques with obviously forged or questionable signature endorsements should
be verified with original payee.
• Altered payees on returned cheques should be verified with intended payee.
• Duplicate or counterfeit cheques indicate fraud. These cheques may be traceable to
depositor through bank cheque coding.
• Questionable deposit dates should be matched to the corresponding customer accounts.
• An examination of all cash advances may reveal that not all advances are properly documented and, therefore, inappropriate payments have been made to employees.
• Customer complaints regarding payments not being applied to their accounts should be
investigated.
• A questionable payee or payee address on a cheque should trigger review of the corresponding cheque and support documentation.

Question 28

Prevention of Cheque Tampering Schemes

Answer 28

Cheque Disbursement Controls
Bank-Assisted Controls
Physical Tampering Prevention
Cheque Theft Control Procedures

Question 29

Cheque Disbursement Controls

Answer 29

• Cheque “cutting” and preparation is not done by a signatory on the account.
• Cheques are mailed immediately after signing.
• Theft control procedures are adhered to (see below).
• Accounts payable records and addresses are secure from possible tampering. Changes in
vendor information should be verified.
• Bank statements should be reviewed diligently ensuring that amounts and signatures have not been altered.
• Bank reconciliations should be completed immediately after monthly statements are
received.
• Bank reconciliations are not made by signatories on the account.
• Bank statements should be reconciled and reviewed by more than one person.
• Appropriate separation of duties should be documented and adhered to.
• Detailed comparisons are routinely made between cheque payees and the payees listed in
the cash disbursement journal.
• Personnel responsible for handling and coding cheques are periodically rotated, keeping
total personnel involved to a minimum.

Question 30

Bank-Assisted Controls

Answer 30

• Establish maximum dollar amounts above which the company’s bank will not accept cheques drawn against the account.
• Use positive pay banking controls. Positive pay allows a company and its bank to work together to detect fraudulent items presented for payment. The company provides the bank with a list of cheques and amounts that are written each day. The bank verifies items presented for payment against the company’s list. The bank rejects items that are
not on the list. Investigations are conducted as to the origin of “nonlist” items.

Question 31

Physical Tampering Prevention

Answer 31

• Signature line void safety band—The word VOID appears on the cheque when photocopied.
• Rainbow foil bar—A horizontal coloured bar placed on the cheque fades and is shaded
from one bar to the next. Photocopied foil bars appear solid.
• Holographic safety border—Holographic images are created in a way that reflects light to reveal a three-dimensional graphic.
• Embossed pearlescent numbering—Cheques are numbered using a new technique that is revealed by a coloured highlighter pen or by a bright light held behind the cheque.
• Other chemical voids—Cheques reveal an image or the word VOID when treated with an eradicator chemical.
• Micro line printing—Extremely small print is too small to read with the naked eye and becomes distorted when photocopied.
• High resolution microprinting—Images are produced on the cheque in high resolution,
2,400 dots per inch or higher. This technique is very difficult to reproduce.
• Security inks—Cheques contain inks that react with eradication chemicals, reducing a
forger’s ability to modify the cheque.
• Chrome coloring—The use of chrome-like coloring deters photocopying even with
color copiers. The chrome pattern or numbering develops solid black.
• Watermark backers—Hidden images can only be seen when the cheque is held at an angle. This image is very difficult to reproduce.
• Ultraviolet ink—This ink displays an image or message when held under ultraviolet lighting.

Question 32

Cheque Theft Control Procedures

Answer 32

• New cheques should be purchased from reputable, well-established cheque producers.
• Unused cheques should be stored in a secure area such as a safe, vault, or other locked area. Security to this area should be restricted to authorised personnel only. Routinely change keys and access codes to storage areas.
• Review all hiring procedures. One of the most important means of fighting fraud is to not hire people with questionable backgrounds. Develop a distinct separation of duties in the accounts payable department, including written policies and procedures for all personnel who have the opportunity to handle cheques, from mailroom clerks to the CEO.
• Use electronic payment services to handle large vendor and financing payments, eliminating the use of paper cheques.
• Report lost or stolen cheques immediately.
• Properly and securely store cancelled cheques.
• Destroy unused cheques for accounts that have been closed.
• Printed and signed cheques should be mailed immediately after signing.

Question 33

There are three principal types of billing schemes:

Answer 33

false invoicing via shell companies, false invoicing via nonaccomplice vendors, and personal
purchases made with company funds.

Question 34

Shell companies are

Answer 34

fictitious entities created for the purpose of committing fraud

Question 35

Pass-Through Schemes

Answer 35

Instead of buying merchandise directly from a vendor, the employee sets up a shell company and purchases the merchandise through that fictitious
entity. He then resells the merchandise to his employer from the shell company at an inflated
price

Question 36

Pay-and-Return Schemes

Answer 36

An employee intentionally mishandles payments that are owed to legitimate vendors (pay to a wrong vendor) and request that one of the cheques
be returned. The clerk then intercepts the returned cheque.

Question 37

Detection of billing schemes:

Answer 37

Analytical Review 
Computer-Assisted Analytical Review
Statistical Sampling 
Vendor or Outsider Complaints 
Site Visits—Observation

Question 38

Detection Fictitious vendors

Answer 38

Vendors and employees with matching addresses
More than one vendor with the same address
Vendors with only post office box addresses

Question 39

Detection Overbilling

Answer 39

Unusual, or “one-time” extra charges

Question 40

Detection Conflict of interest

Answer 40

Vendors with employees who are employee family
members
An unusually high occurrence of complaints
Complaints about specific vendors
Higher prices and/or substandard quality

Question 41

The following audit program may be beneficial in detecting red flags to billing schemes:

Answer 41

• Does the company have a purchasing department? If yes, is it independent of (1) the
accounting department, (2) the receiving department, or (3) the shipping department?
• Are purchases made only after the respective department heads sign purchase requisitions?
• Are purchases made by means of purchase orders sent to vendors for all purchases or only for purchases over a predetermined dollar limit?
• Do purchase orders specify a description of items, quantity, price, terms, delivery
requirements, and dates?
• Is a list of unfilled purchase orders maintained and reviewed periodically?
• Are purchase order forms prenumbered and is the sequence accounted for periodically?
• Does the client maintain an approved vendors list?
• Are items purchased only after competitive bids are obtained? If so, are competitive bids
obtained for all purchases or only for purchases over a predetermined dollar limit?
• Is a log maintained of all receipts?
• Does the receiving department prepare receiving reports for all items received? If yes,
are receiving reports (1) prepared for all items, (2) prepared only for items that have
purchase orders, or (3) renumbered?
• At the time the items are received, does someone independent of the purchasing
department check the merchandise before acceptance as to description, quantity, and
condition?
• Are copies of receiving reports (1) furnished to the accounting department, (2) furnished
to the purchasing department, or (3) filed in the receiving department?
• Are receipts under blanket purchase orders monitored, and are quantities exceeding
authorised total returned to the vendor?
• Are procedures adequate for the proper accounting for partial deliveries of purchase
orders?
• Are purchasing and receiving functions separate from invoice processing, accounts
payable, and general ledger functions?
• Are vendors’ invoices, receiving reports, and purchase orders matched before the related
liability is recorded?
• Are invoices checked as to prices, extensions, footings, freight charges, allowances, and
credit terms?
• Are controls adequate to ensure that all available discounts are taken?
• Are purchases recorded in a purchase register or voucher register before being processed
through cash disbursements?
• Does a responsible employee assign the appropriate general ledger account distribution
to which the invoices are to be posted?
• Are procedures adequate to ensure that invoices have been processed before payment
and to prevent duplicate payment (e.g., a block stamp)?
• Does a responsible official approve invoices for payment?
• Are procedures adequate to ensure that merchandise purchased for direct delivery to
customers is promptly billed to the customers and recorded as both a receivable and a
payable?
• Are records of goods returned to vendors matched to vendor credit memos?
• Are unmatched receiving reports, purchase orders, and vendors’ invoices periodically
reviewed and investigated for proper recording?
• Is the accounts payable ledger or voucher register reconciled monthly to the general
ledger control accounts?
• Are statements from vendors regularly reviewed and reconciled against recorded
liabilities?
• Do adjustments to accounts payable (e.g., writing off of debit balances) require the
approval of a designated official?
• Are budgets used? If yes, are budgets approved by responsible officials, and are actual
expenditures compared with budgeted amounts and variances analysed and explained?
• If excess inventory purchasing is suspected, verify that all inventory purchased was
received (receiving report) at the proper location. An examination of receiving reports or
invoices might reveal alternate shipping sites.

Question 42

Probably the most effective purchasing fraud prevention measure is

Answer 42

education (training) of the purchasing and payable personnel

Question 43

The second most effective purchasing fraud

prevention measure is

Answer 43

an objective compensation arrangement with people responsible for purchasing decisions

Question 44

The following is a list of billing scheme prevention methods that may be helpful in the
deterrence of billing fraud:

Answer 44

• Authorisation procedures of purchase orders, invoicing, and payments should be documented and adhered to.
• The accounts payable list of vendors should be periodically reviewed for strange vendors and addresses.
• Payment codings should be reviewed for abnormal descriptions.
• Vendor purchases should be analysed for abnormal levels on both a monthly and yearly
basis.
• Purchases and inventory levels should be compared and analysed.
• Control methods to check for duplicate invoices and purchase order numbers should be in place.
• A separation of duties between authorisation, purchasing, receiving, shipping, and accounting should be in place.
• Payment of vouchers should be periodically reviewed to ensure integrity of proper documentation.
• Receiving and shipping reports should be reviewed for completeness and accuracy.
• Asset information should include purchasing trails and other information.
• Journal entries to inventory accounts should be strictly scrutinised.
• Appropriate bank reconciliation and review procedures should be performed periodically, checking for out-of-place vendors and endorsements.
• Credit card statements should be reviewed often for irregularities.
• The validity of invoices with a post office box address should be verified.
• Proper controls for the receipt and handling of “return to sender” cheques should be installed.

Question 45

Prevention of Billing Schemes

Answer 45

Education (Training)
Compensation
Proper Documentation
Proper Approvals 
Segregation of Duties
Hotlines 
Competitive Bidding

Question 46

Payroll Fraud Schemes

Answer 46

In payroll schemes, the perpetrator typically falsifies a timecard or alters information in the payroll
records

Question 47

The term ghost employee refers to

Answer 47

omeone on the payroll who does not actually work for the victim company

Question 48

In order for a ghost employee scheme to work, four things must happen:

Answer 48

(1) the ghost must be added to the payroll, (2) timekeeping and wage rate information must be collected, (3) a paycheque must be issued to the ghost, and (4) the cheque must be delivered to the
perpetrator or an accomplice.

Question 49

In other words, there are two ways an

employee on commission can fraudulently increase his pay:

Answer 49

(1) falsify the amount of sales made, or (2) increase his rate of commission

Question 50

Detection of Payroll Schemes

Answer 50

Independent Payroll Distribution
Analysis of Payee Address or Accounts
Duplicate Identification Numbers
Overtime Authorisation
Analysis of Deductions from Payroll Cheques

Question 51

Commission schemes can often be detected with the following techniques:

Answer 51

Compare commission expenses to sales figures to verify linear correlation.
• Prepare a comparative analysis of commission earned by salesperson, verifying rates and
calculation accuracy. Inordinately high earnings by an individual could signal fraud.
• Analyse sales by salesperson for uncollected sales amounts.
• Determine proper segregation of duties in calculation of commission amounts.
Commissions should be independently provided by personnel outside the sales department.
• Contact a random sample of customers to confirm sales.

Question 52

Stratify the written-off accounts receivable data and examine it for possible trends and patterns. For example, do any of the following trends appear?

Answer 52

• Same salesperson
• Same accounting period (unless only an annual review of accounts receivable is performed)
• Same collector
• Collection rates by agency or collector

Question 53

There are two basic preventive measures for payroll-related fraud:

Answer 53

segregation of duties and periodic payroll review and analysis.

Question 54

The following duties should be segregated

Answer 54

• Payroll preparation
• Payroll disbursement (into payroll and withholding tax accounts)
• Payroll distribution
• Payroll bank reconciliations
• Human resource departmental functions

Question 55

The existence of the following may indicate the presence of ghost employees:

Answer 55

• More than one employee with the same address.
• More than one employee with the same government identification number.
• More than one employee with the same account number (automatic deposit).
• Employees with no withholding.

Question 56

In addition, the following audit program will help spot red flags to payroll distribution fraud and help with installing control procedures:

Answer 56

• Are personnel records maintained independently of payroll and timekeeping functions?
• Is the payroll accounting function independent of the general ledger function?
• Are changes to payroll not made unless the personnel department sends approved
notification directly to the payroll department?
• Are references and backgrounds checked for new hires?
• Are all wage rates authorised in writing by a designated official?
• Are signed authorisations on file for employees whose wages are subject to special
deductions?
• Are bonuses, commissions, and overtime approved in advance and reviewed for
compliance with company policies?
• Are sick leave, vacations, and holidays reviewed for compliance with company policy?
• Are appropriate forms completed and signed by employees to show authorisation for
payroll deductions and withholding exemptions?
• Is the payroll periodically checked against the personnel records for terminated
employees, fictitious employees, etc.?
• Is a time clock used for office employees as well as factory workers?
• If a time clock is used, are timecards (1) punched by employees in the presence of a
designated supervisor and (2) signed by a supervisor at the end of the payroll period?
• Are timecards and production reports reviewed and compared with payroll distribution
reports and production schedules?
• Are payroll registers reviewed and approved before disbursements are made for (1)
names of employees, (2) hours worked, (3) wage rates, (4) deductions, (5) agreement with
payroll cheques, and (6) unusual items?
• Are all employees paid by cheque out of a separate bank payroll account?
• Are payroll cheques prenumbered and issued in numerical sequence?
• Is access restricted to unissued payroll cheques and signature plates?
• Are cheques drawn and signed by designated officials who do not (1) prepare payroll, (2)
have access to the accounting records, or (3) have custody of cash funds?
• Are payroll cheques distributed by someone other than the department head or the
person who prepares the payroll?
• Is the distribution of the payroll rotated periodically to different employees without prior
notice?
• Is the payroll bank account reconciled by a designated employee who (1) is not involved
in the preparing of payroll, (2) does not sign the cheques, or (3) does not handle the
cheque distributions?
• Do payroll bank account reconciliation procedures include comparing the paid cheques
to the payroll, and scrutinising cancelled cheque endorsements?
• Are the payroll registers reconciled to the general ledger control accounts?
• Is a liability account set up for all wages that have remained unclaimed for a certain
period of time? If yes, (1) have these wages been redeposited in a special bank account,
and (2) is identification required to be presented at the time of their subsequent
distribution?
• Are distributions of hours (direct and indirect) to activity or departments reviewed and
approved by supervisory personnel?
• Are actual payroll amounts reviewed and compared to budgeted amounts, and are
variances analysed regularly?
• Do adequate procedures exist for timely and accurate preparation and filing of payroll
tax returns and related taxes?
• Are employee benefit plan contributions reconciled to appropriate employee census
data?
• Are adequate, detailed records maintained of the entity’s liability for vacation pay and
sick pay? Are they reconciled to the general ledger control accounts periodically?

Question 57

Expense Reimbursement Schemes

Answer 57

Mischaracterised Expense Reimbursements

Overstated Expense Reimbursements

Question 58

Overstated Expense Reimbursements

Answer 58

Altered Receipts
Overpurchasing
Overstating Another Employee’s Expenses
Orders to Overstate Expenses

Question 59

Fictitious Expense Reimbursements

Answer 59

Producing Fictitious Receipts
Obtaining Blank Receipts from Vendors
Claiming the Expenses of Others
Multiple Reimbursements

Question 60

Detection of Expense Reimbursement Schemes

Answer 60

Review and Analysis of Expense Accounts

Detailed Review of Expense Reports

Question 61

Detailed expense reports should require the following information:

Answer 61

• Receipts or other support documentation
• Explanation of the expense including specific business purpose
• Time period expense occurred
• Place of expenditure
• Amount