Albert owned and operated 40 coin laundries around town. As the business grew, he could no longer visit each one, empty the cash boxes, and deposit the receipts. Each location grossed about $140 to $160 per day, operating 365 days per year—gross receipts of about $2 million per year. Each of four part-time employees visited 10 locations, collecting the cash boxes and delivering them to Albert’s office where he would count the coins and currency (from the change machine) and prepare a bank deposit. One of the employees skimmed $5 to $10 from each location visited each day.
The daily theft does not seem like much, but at an average of $7.50 per day from each of 10 locations, totaled about $27,000 per year. If all four of the employees had stolen the same amount, the loss could have been over $100,000 per year.
Audit Approach
Controls over the part-time employees were nonexistent. There was no overt or covert surprise observation and no times when two people went to collect cash (thereby needing to agree, in collusion, to steal). There was no rotation of locations or other indications to the employees that Albert was concerned about control. With no controls, there is no test of control activities. Obviously, however, “thinking like a crook” leads to the conclusion that the employees could simply pocket money.
Assuming that some employees are honest, periodically rotating the stores assigned to each employee and performing revenue comparisons (analytical procedures) on a store-bystore basis may be helpful. If revenues consistently decline for stores assigned to a specific employee, further investigation may be warranted.
Required
Based on the audit approach discussed, how might an auditor devise a procedure to catch this fraudulent scheme?