Three Receipt Fraud Tests

Today I provide three receipt-fraud tests for auditors. 

The audit standards require that we introduce elements of unpredictability. Additionally, it’s wise to perform fraud tests. But I find that auditors struggle with brainstorming (required by AU-C 240, Consideration of Fraud in a Financial Statement Audit) and developing fraud tests. That’s why I wrote Five Disbursement Fraud Tests. It’s also why I am providing this post.

So, let’s jump in. Here are three receipt-fraud tests.

Three Receipt-Fraud Tests

1. Test adjustments made to receivables

Why test?

Receipt clerks sometimes steal collected monies and write off (or write down) the related receivable. Why does the clerk adjust the receivable? So the customer doesn’t receive a second bill for the funds stolen. 

How to test?

Obtain a download of receivable adjustments for a period (e.g., two weeks) and see if they were duly authorized. Review the activity with someone outside the receivables area (e.g., CFO) who is familiar with procedures but who has no access to cash collections.

If there are multiple persons with the ability to adjust receivable accounts (quite common in hospitals), compare weekly or monthly adjustments made by each employee.

Agree receipts with bank deposits.

2. Confirm rebate (or similar type) checks

Why test?

When rebate checks are not sent to a central location (e.g., receipting department), the risk of theft increases. Rebate checks are often not recorded as a receivable, so the company may not be aware of the amounts to be received. Stealing unaccrued receivable checks is easy.

How to test?

Determine which vendors provide rebate checks (or similar non-sales payments). Send confirmations to the vendors and compare the confirmed amounts with activity in the general ledger.

Theft of rebate checks is more common in larger organizations (e.g., hospitals) where checks are sometimes received by various executives. The executive receives a check in the mail and keeps it for a while (in his desk drawer – in case someone asks for it). Once he sees that no one is paying attention, he steals and converts the check to cash.

3. Search for off-the-book thefts of receipts

Why test?

The fraudster may bill for services through the company accounting system or an alternative set of accounting records and personally collect the payments.

How to test?

Compare revenues with prior years and investigate significant variances. Alternatively, start with source documents and walk a sample of transactions to revenue recognition, billing, and collection.

Here are a few examples of actual off-the-book thefts:

Police Chief Steals Cash

An auditor detected a decrease in police-fine revenue in a small city while performing audit planning analytics. Upon digging deeper, he discovered the police chief had two receipt books, one for checks that were appropriately deposited and a second for cash going into his pocket. Sometimes, even Andy Griffith steals.

Hospital CFO Steals Cash

A hospital CFO, while performing reorganization procedures, set up a new bank account specifically for deposit of electronic Medicaid remittances. He established himself as the authorized bank account check-signer.

The CFO never set up the bank account in the general ledger. As the Medicaid money was electronically deposited, the CFO transferred the funds to himself.  What was the money used for? A beautiful home on Mobile Bay, new cars, and gambling trips.

Another Receipt Fraud to Consider

Sometimes it’s not the front-desk receipt clerk that steals. Surprisingly, your receipt supervisor can be on the take. So, consider that receipt theft takes place up-front and in the back-office.