Asset Misappropriation Schemes Flashcards

An employee in the accounts receivable department steals a customer's payment before it is recorded in the company's books. To conceal the theft, the employee applies a payment from another customer to the first customer's account. This fraudulent scheme is best described as:

Answer: Lapping

Lapping is a common accounts receivable fraud scheme where an employee steals a payment from one customer and then uses a subsequent payment from another customer to cover the first theft, creating a continuous cycle that is difficult to detect. Skimming is the theft of cash before it's recorded, but lapping specifically involves the continuous covering of stolen funds with new payments. Cash larceny is the theft of cash that has already been recorded on the books. A billing scheme involves creating fraudulent invoices to generate a payment.

Which of the following is considered a 'red flag' or behavioral indicator that might suggest an employee is involved in an asset misappropriation scheme?

Answer: Consistently refusing to take vacation or share job duties.

Employees involved in fraud often avoid taking time off or letting others handle their tasks because they fear their scheme will be discovered in their absence. This unwillingness to share duties is a classic behavioral red flag. The other options are generally normal workplace behaviors and not typically associated with fraudulent activity.

A payroll clerk creates a fictitious employee in the company's payroll system and arranges for the ghost employee's paycheck to be directly deposited into a bank account controlled by the clerk. This type of asset misappropriation is a form of:

Answer: Fraudulent Disbursement

This scenario describes a fraudulent disbursement, specifically a payroll scheme. A fraudulent disbursement occurs when an employee causes the organization to issue a payment for a dishonest purpose. Creating a 'ghost employee' is a classic method for this type of fraud. Skimming involves off-book theft of incoming cash. Expense reimbursement fraud involves false claims for expenses, and non-cash misappropriation involves the theft of physical assets like inventory.

What is the primary difference between cash larceny and skimming?

Answer: Cash larceny is the theft of cash that has already been recorded on the company's books, while skimming is the theft of off-book funds.

The key distinction between cash larceny and skimming lies in the timing of the theft relative to the company's accounting records. Cash larceny is the theft of cash that has already been entered into the accounting system ('on-book' theft). Skimming is the theft of cash before it has been recorded ('off-book' theft), which makes it harder to detect as there is no initial record of the funds.

An employee uses a company credit card to purchase a home theater system for personal use and submits the expense report with a receipt from a business dinner of the same amount. This is an example of which type of asset misappropriation scheme?

Answer: Expense Reimbursement Fraud

This is a classic example of expense reimbursement fraud, where an employee makes a claim for reimbursement of fictitious or inflated business expenses. The employee is mischaracterizing a personal expense as a legitimate business expense to receive payment from the company. A billing scheme would involve creating a fake invoice, check tampering involves altering a company check, and theft of non-cash assets would involve stealing something like inventory or equipment.

Which of the following scenarios describes a non-cash asset misappropriation scheme?

Answer: A warehouse employee steals a pallet of inventory and sells it to a third party.

Non-cash asset misappropriation involves the theft or misuse of physical assets such as inventory, equipment, or supplies. Stealing inventory from a warehouse falls directly into this category. The other options are all cash misappropriation schemes: voiding a sale is a form of fraudulent disbursement from the register, forging a check is check tampering, and approving a fake invoice is a billing scheme.