Cash control and security - Common fraud indicators

Learning Outcomes

After completing this article, you will be able to identify the main types of cash fraud, explain the most common fraud indicators, and outline effective internal controls for securing cash. You will understand how to spot, prevent, and address risks around cash handling, as required for ACCA Maintaining Financial Records (FA2).

ACCA Maintaining Financial Records (FA2) Syllabus

For ACCA Maintaining Financial Records (FA2), you are required to understand the risks and indicators associated with cash and the basic controls that reduce fraud. The exam expects you to:

• Recognise typical types of cash fraud and methods of misappropriation
• Identify warning signs (indicators) that suggest fraud may be occurring
• Understand the purpose and structure of basic internal cash controls
• Explain the importance of regular cash reconciliations and segregation of duties

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which of the following is a potential indicator of cash fraud?
   1. Cash receipts always match the sales records
   2. Frequent unexplained cash shortages
   3. Regular bank reconciliations with no discrepancies
   4. Segregation of duties in cash handling
2. What is the main purpose of segregation of duties in cash control?
   1. To speed up banking deposits
   2. To ensure one person handles all aspects of cash
   3. To reduce the risk of fraud or errors
   4. To reduce the amount of paperwork

3. True or false? Falsifying supplier invoices is a common method used in cash fraud schemes.

4. Give two examples of controls that help safeguard cash in a business.

Introduction

Cash is one of the most vulnerable assets in any business. If cash is mishandled or controls are weak, it becomes an easy target for fraud or theft. As someone responsible for recording or managing financial information, you must recognise both the ways cash fraud can occur and the signs that it may be happening. The core of any effective cash system is control—preventing, detecting, and correcting errors or dishonesty. This article will examine common cash fraud methods, typical warning signs, and the controls every business should have in place.

Key Term: fraud
The act of deliberately deceiving a business for personal gain, often involving theft, falsification of records, or manipulation of cash transactions.

Key Term: internal control
The policies and procedures established by management to safeguard assets, ensure accuracy of records, and prevent or detect fraud and error.

CASH FRAUD: METHODS AND RISKS

Fraud involving cash can occur at any stage in the receipt, handling, or recording of cash. It is essential to understand the principal methods.

Theft of Cash Receipts

Cash may be stolen before it is recorded (skimming) or after it has been recorded but before bank deposit (lapping). Sometimes cash is removed when under-counting sales or not issuing receipts.

Unauthorised Payments

Fraud can occur through issuing false refunds, fictitious supplier payments, or pocketing cash intended for expenses. Payments may also be made to non-existent suppliers.

Falsifying Records

Records may be altered to conceal missing cash—by manipulating till records, bank reconciliations, or ledger accounts.

COMMON FRAUD INDICATORS

There are certain warning signs, known as "fraud indicators", that should alert you to possible issues in cash handling. Recognising these early is critical for preventing larger losses.

Unexplained Differences in Cash Count

Regular shortages or overages when comparing recorded cash to actual physical cash point to possible theft or error. Repeated unexplained differences are a red flag.

Delayed or Irregular Bankings

If cash receipts are not deposited promptly, or bank deposits do not reflect recorded receipts, there may be misappropriation or concealment.

Altered or Missing Documentation

Receipts, invoices, or other cash-related records that are missing, altered, or illegible suggest fraudulent activity.

Unusual Refunds or Voids

Excessive or poorly documented refunds and voids may mean cash is being stolen and disguised through the system.

Lack of Segregation of Duties

If one person handles all aspects of cash—receiving, recording, reconciling, and depositing—there is increased risk of undetected fraud.

ESSENTIAL CASH CONTROL MEASURES

A strong internal control system is the most effective way to minimise cash fraud.

Segregation of Duties

No single staff member should be responsible for every stage of cash handling. Ideally, one person collects and issues receipts, another records transactions, and a third reconciles and deposits funds.

Key Term: segregation of duties
Dividing responsibilities among different people to reduce the chance of fraud or error and strengthen oversight.

Regular Bank and Cash Reconciliations

All cash receipts and payments should be reconciled frequently to bank statements and till reports. Discrepancies must be investigated promptly.

Physical Security

Cash should be kept in locked safes or drawers, with restricted access and minimal amounts held on premises outside banking hours.

Supervisor Checks and Audits

Random cash counts and regular review by someone not directly involved in daily cash handling can identify fraud early.

Key Term: cash reconciliation
The process of comparing recorded cash balances with actual cash held and bank balances to identify and resolve differences.

Documentation

Complete, accurate, and sequential documentation (e.g. receipts, invoices, deposit slips) is essential. Gaps or alterations raise suspicion and should be checked.

Worked Example 1.1

A retail shop consistently has minor cash shortfalls at the end of day. The cashier is responsible for taking sales, recording transactions, balancing the till, and depositing cash at the bank. The supervisor only checks sales summaries, not cash records.

Explain what fraud indicators are present and how controls could be improved.

Answer:
Repeated unexplained cash shortages are an indicator of possible theft or error. The lack of segregation of duties means the cashier could steal cash and manipulate records to conceal it. Controls should be strengthened by splitting cash handling, daily reconciliation with supervisor oversight, and more frequent audits.

Worked Example 1.2

During an internal check, a company discovers that some supplier payments have been made to accounts with names similar to genuine suppliers. The same employee generates orders, approves invoices, and processes payments.

Identify the fraud risk and suitable control actions.

Answer:
This is an example of unauthorised (fraudulent) payments through creation of fictitious suppliers. The lack of segregation allowed one person to commit and conceal fraud. Controls should assign purchasing, approval, and payment functions to different staff, require all new suppliers to be authorised independently, and regularly review supplier lists.

Exam Warning

Watch for questions that describe routine discrepancies or poorly-documented cash activities. In the exam, you may be asked to identify specific fraud indicators within a short scenario or choose the most effective control for a particular situation.

Revision Tip

Focus on the sequence: Identify—Explain—Control. Always link the fraud method to its indicator and the suitable control response.

Summary

Fraud involving cash is common due to cash's attractiveness and ease of concealment. Regular unexplained cash variances, missing documentation, and irregular banking are key indicators of fraud. Effective internal controls—especially segregation of duties, reconciliation, and thorough documentation—are essential to minimise risk. Always investigate inconsistencies promptly.

Key Point Checklist

This article has covered the following key knowledge points:

• Define cash fraud and describe common fraud methods
• List typical fraud indicators in cash handling
• Explain the role and examples of internal cash controls
• Understand the importance of segregation of duties and reconciliation
• Know how to respond to warning signs promptly and effectively

Key Terms and Concepts

• fraud
• internal control
• segregation of duties
• cash reconciliation