Question

Anderson embezzled $20,000 from her company's account in Bank X. At year-end, she hid the shortage by making a deposit on December 31 in Bank X, drawn on Bank Y. She has not recorded the transaction on the books. What is most likely to be effective in detecting this fraud?

Answer 1

Answer: Compare the cash receipts and cash payment records to the bank cutoff statement

Explanation: This form of fraud is known as kiting. Kiting involves using payment means such as cheques to embezzle (steal) cash from a company.

This is how it works using the scenario given:

Anderson had access to the company's cheques. Instead of depositing all the cheques he then cashed all the cheques into Bank X but one, cashing it for himself. Because the company requires all the cheques received to cover it's costs, it ends up recording a loss. To counteract this beforehand, Anderson then writes another cheque to cover the overdraft (loss) value. During the time when this cheque still need to clear Anderson then writes another cheque from Bank Y to cover the overdraft in Bank X. This gave Anderson more time until the 2nd cheque cleared to cover his tracks. At that point more deposits will come into the business allowing him to have more money available to replace these funds (in cheques 1 and 2), while he can then embezzle more money.

Comparing the cut off statement to the cash receipts and cash payments records allows you to trace the movements of cash (according to the bank statement) and when they occurred for that specific financial year. Any dates identified in the bank statement that don't show movement of cash according to the records will be flagged as an indicator of fraud and traced.