Occupational Fraud Schemes

Question 1

What should a detailed expense report include?

Answer 1

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

Question 2

What is LAPPING?

Answer 2

• one of the most common methods of concealing skimming

- the crediting of one account through the abstraction of money from another account.

Question 3

What is CHECK TAMPERING?

Answer 3

type of fraudulent disbursement scheme in which an employee either

(1) prepares a fraudulent check for his own benefit
(2) intercepts a check intended for a third party and converts the check for his own benefit.

Question 4

How does a GHOST EMPLOYEE SCHEME work?

Answer 4

Four things must happen:

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

ghost employee may be a fictitious person or a real individual who simply does not work for the victim employer

Question 5

what are SHELL COMPANIES?

Answer 5

often fictitious entities created for the sole purpose of committing fraud

Most schemes involve purchase of services rather than goods - because services are not tangible

• can be detected by comparing purchases to its inventory levels

Question 6

What are the different EXPENSE REIMBURSEMENT schemes?

Answer 6

(1) MISCHARACTERIZED - simply requesting reimbursement for a personal expense, claiming that it is business related
(2) OVERSTATED - some employees overstate the cost of actual business expenses
(3) FICTITIOUS. - seeks reimbursement for wholly fictitious expenses
(4) MULTIPLE - employee submits several types of support for the same expense in order to get reimbursed multiple times

Question 7

What is a FICTITIOUS REVENUE SCHEME?

Answer 7

• The recording of sales of goods or services that did not occur
• most often involve fake customers but can also involve legitimate customers
• involves increase to accounts receivable
• If the outstanding accounts never get collected, they will eventually need to be written off as bad debt expense

Question 8

What is a PAY AND RETURN SCHEME?

Answer 8

an employee intentionally mishandles payments that are owed to legitimate vendors

Question 9

HOW TO PREVENT PAYROLL FRAUD?

Answer 9

(1) segregation of duties and (2)

periodic payroll review and analysis

Question 10

How to CONCEAL inventory shrinkage?

Answer 10

• altering the perpetual inventory (increase only worse - should decrease)
• make it appear that more assets present then reality (i.e. empty boxes or boxes filled with other things) = PHYSICAL PADDING
• writing it off as scrap before or after stolen
• FORCED RECONCILIATION (alter the inventory record so that it matches inventory count)

Question 11

How is INVENTORY FRAUD detected?

Answer 11

• analytical review (sales and cost of goods sold should move together since they are directly related)
• when COGS increases by a disproportionate amount and no changes occur in price, quantity, quality, the cause can be due to the following (3) things:
  (1) - ending inventory depleted by theft
  (2) - embezzlement through false billing
  (3) - skimming sakes revenue

Question 12

What is financial statement fraud ?

Answer 12

Deliberate misrepresentation of financial position by intentionally misstating/omitting amounts.

almost always involves:

(1) overstated assets or revenue - falsely reflects a financial stronger company
(2) understated liabilities and expenses

both increase equity and net worth

Question 13

What are some types of FRAUDULENT DISBURSEMENT Schemes?

Answer 13

• Register disbursement schemes
• Check tampering schemes
• Payroll schemes
• Billing schemes
• Expense reimbursement schemes

Question 14

How is SKIMMING detected?

Answer 14

• reviewing and analyzing all journal entries made to the cash and inventory accounts

Journal entries to be examined included:

• Credits to inventory to conceal unrecorded or understated sales
• Write-offs of lost, stolen, or obsolete inventory
• Write-offs of accounts receivable accounts
• Irregular entries to cash accounts

IF lapping involved - can be detected by independent confirmation of customers’ account balances

Question 15

What effect does improperly capitalizing assets have?

Answer 15

• increases income and assets to make statements appear stronger

current period - overstated income

next period - income understated

Question 16

What are PASS-THROUGH SCHEMES?

Answer 16

undertaken by employees in charge of purchasing on the victim company’s behalf.

Instead of buying merchandise directly from a vendor, the employee sets up a shell company and purchases the merchandise through that fictitious entity.

Question 17

How to prove corrupt payments?

Answer 17

• Turn an inside witness.
• Secretly infiltrate or record ongoing transactions.
• Identify and trace the corrupt payments through audit step

Question 18

What is a FICTITIOUS REFUND SCHEME?

Answer 18

• an employee processes a transaction as if a customer were returning merchandise, even though no actual return takes place

Two things happen

(1) money taken appears legitimate
(2) as nothing actually returned, inventory is overstated

Question 19

What is positive pay?

Answer 19

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 checks 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 the “unlisted” items.

Question 20

What is an understated skimming sales scheme?

Answer 20

commonly undertaken by employees who work at the cash register

employee enters a sales total that is lower than the amount actually paid by the customer and skims difference

Question 21

What are the types of occupational fraud schemes?

Answer 21

Bribery and Corruption
Fraudulent Disbursements
Financial Statement Fraud
Cash Receipts
Inventory and Other assets

Question 22

What are the types of bribery and corruption?

Answer 22

Kickbacks, illegal gratuity, collusion and extortion.

Question 23

What are the methods of making payments corrupt?

Answer 23

– Gifts, travel, and entertainment
– Cash payments
– Checks and other financial instruments
– Hidden interests
– Loans
– Credit cards
– Transfers not at fair market value
– Promises of favorable treatment

Question 24

What are the two types of cash receipt schemed?

Answer 24

Skimming and Cash Larcency

Question 25

What is Skimming and what are the types?

Answer 25

aka off-book sales of goods

Removal of cash before its recorded.

Will ALWAYS leave an inventory shortage and a rise to COGS.

Types of Skimming schemes:
Understated Sales
Unrecorded Sales
Lapping of receivables

Question 26

What are some effective controls of skimming?

Answer 26

Installing visible video cameras to monitor cash registers

Restrict a/r clerk from preparing bank deposit

Reconciling physical inventory count with perpetual inventory count.

Question 27

What is the difference between cash larceny and skimming?

Answer 27

Cash larceny is theft of cash that has been recorded and skimming is theft of cash or receivables not recorded.

Question 28

How can you prevent cash larceny?

Answer 28

• Surprise cash counts
• Having all employees use the same cash register and each employee should have a unique code to the cash registers
• Mandatory vacations; employee’s normal workload be performed by another individual.
• separation of duties between, Cash receipts, Bank deposits, Bank reconciliation, Cash disbursements

Question 29

Why is financial statement fraud committed?

Answer 29

• To encourage investment through the sale of stock
• To demonstrate increased earnings per share or partnership profits interest, thus allowing increased dividend/distribution pay-outs
• To cover inability to generate cash flow
• To obtain financing, or to obtain more favourable terms on existing financing
• To receive higher purchase prices for acquisitions
• To demonstrate compliance with financing covenants
• To meet company goals and objectives
• To receive performance-related bonuses

Question 30

How is financial statement fraud committed?

Answer 30

Through fictitious revenue schemes, timing differences, improper asset valuations, improper disclosures, concealed liabilities and expenses

Question 31

What are examples of timing differences?

Answer 31

Premature revenue recognition

Completed contract vs. percentage of completion method

recording expenses in wrong period

Question 32

What are examples of improper asset valuations?

Answer 32

Inventory, accounts receivable, fixed assets

Question 33

What happens when you expense expenditures/costs?

Answer 33

lower net income

Question 34

What happens when you capitalize expenses?

Answer 34

increase net income

Question 35

What happens if expenditures are capitalized as assets?

Answer 35

overstated net income

Question 36

What constitutes an improper disclosure?

Answer 36

• liability omissions ( not recording if probably that a loss will occur and amount can be reasonably estimated)
• subsequent events (if impact on financial position such as court judgement, must disclose)
• accounting changes (three changes must be disclosed: changes in accounting principles, estimates and reporting entities)

Question 37

what are the (3) techniques of analysing financial statements?

Answer 37

vertical
- analyzing relationships among items on statement by expressing components as percentages

horizontal
- percentage change in individual financial statement items from one period to next

ratio
- current (current assets/ current liab)

• quick ( cash + securities + receivables/ current liabilities)
• accounts receivable ( net sales/ average net receivables)
• debt to equity ( total liab / total equity)
• profit margin (net income / net sales)
• asset turnover (net sales / average total assets)

Question 38

What are the three types of payroll schemes?

Answer 38

Ghost employees

Falsified hours and salary

Commission schemes

Question 39

How can you prevent fraud in electronic payments?

Answer 39

• implement ACH blocks and filters
• positive pay for ACH transactions
• Have separate bank accounts for paper checks and electronic payments

Question 40

What are common methods of committing a falsified hours and salary scheme?

Answer 40

Common ways to commit a falsified hours and salary scheme include:

Inflating the number of hours worked

Inflating the rate of pay

Forging a supervisor’s signature

Collusion with a supervisor

Implementing poor custody procedures

Altering a time sheet after it has been approved

Question 41

What are the (3) types of billing schemes?

Answer 41

Invoicing via shell companies

Invoicing via nonaccomplice vendors

Personal purchases with company funds

Question 42

What are the four types of check tampering schemes?

Answer 42

Forged maker

Forged endorsement

altered payees

authorized maker

Question 43

What is an ACH Filter?

Answer 43

It enables account holders to provide their banks with a list of criteria to ensure only designated individuals get paid.

Question 44

What are the two ways an asset can be misappropriated?

Answer 44

he asset can be misused (or “borrowed”) or it can be stolen.