Cash Fraud Detection Simulator
An Auditor's Toolkit for the Cash Cycle
Common Cash Fraud Schemes
Cash is highly susceptible to fraud. Auditors must be vigilant for schemes designed to conceal theft or misstate cash balances. Here are two of the most common.
Lapping
Lapping is the theft of cash receipts from one customer, concealed by applying a subsequent customer's payment to the first customer's account.
Example: An employee steals Customer A's $500 payment. When Customer B pays $500, the employee applies it to Customer A's account to hide the theft. Customer B's account remains overstated until another payment is diverted.
Key Safeguards:
- Mandatory vacations for employees.
- Segregation of duties (cash handling vs. A/R record keeping).
- Independent comparison of deposit slips to cash receipts records.
- Best Method: Use of a "lock box" system where customers pay directly to the bank.
Kiting
Kiting creates an overstatement of cash by recording a deposit from an interbank transfer while failing to record the disbursement from the other bank until the next period.
Example: On Dec 30, a check is drawn on Bank A and deposited in Bank B. The company records the receipt in Bank B on Dec 31, but doesn't record the disbursement from Bank A until Jan 2. For one day, the cash appears in both bank accounts.
Key Detection Tools:
- Bank Transfer Schedule: Analyzes the dates of all transfers around year-end.
- Bank Cutoff Statement: A statement for the first 7-15 days after year-end, sent directly to the auditor, used to verify reconciling items cleared promptly.
Kiting Detection: Bank Transfer Schedule
An auditor prepares a bank transfer schedule to look for signs of kiting. The key is to compare the recording dates. A disbursement recorded *after* its corresponding receipt is a major red flag. Click the button to run the kiting test.
| Check # | From Bank | To Bank | Amount | Disbursement Date (Books) | Receipt Date (Books) |
|---|---|---|---|---|---|
| 1021 | National Bank | City Bank | $50,000 | Dec 28, 2024 | Dec 29, 2024 |
| 1022 | Federal Bank | State Bank | $120,000 | Dec 29, 2024 | Dec 30, 2024 |
| 1023 | National Bank | Federal Bank | $75,000 | Jan 02, 2025 | Dec 30, 2024 |
| 1024 | City Bank | State Bank | $200,000 | Dec 30, 2024 | Dec 31, 2024 |
| 1025 | State Bank | National Bank | $95,000 | Jan 03, 2025 | Dec 31, 2024 |
Auditing the Bank Reconciliation
The year-end bank reconciliation is a cornerstone of the cash audit. The auditor must verify each component. Click the "Trace" buttons to simulate key audit steps.
ABC Company Bank Reconciliation
As of December 31, 2024
