Five Disbursement Fraud Audit Tests

You are leading the audit team discussion concerning disbursements, and a staff member asks, “why don’t we ever perform fraud tests?”

Your rejoinder, somewhat lacking, but said with authority, is, “We are only required to perform such tests in certain circumstances. What do you suggest?”

“I don’t know,” the staff member sheepishly responds. “What are some possibilities?”

You pause to consider the question, and you remember a blog post addressing how fraud can sting auditors. You begin to think, “what can we do?”

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Five Disbursement Fraud Tests

1. Test for duplicate payments.

Why test?

Theft may occur as the accounts payable clerk generates the same check twice, stealing and converting the second check to cash. The second check may be created in a separate check batch, a week or two later. This threat increases if (1) checks are signed electronically or (2) the check-signer commonly does not examine supporting documentation and the payee name.

How to test?

Obtain a download of the full check register in Excel. Sort by dollar amount and vendor name. Then investigate same-dollar payments with same-vendor names above a certain threshold (e.g., $25,000).

2. Review the accounts payable vendor file for similar names.

Why test?

Fictitious vendor names may mimic real vendor names (e.g., ABC Company is the real vendor name while the fictitious name is ABC Co.). Additionally, the home address of the accounts payable clerk is assigned to the fake vendor (alternatively, P.O. boxes may be used).

The check-signer will not recognize the payee name as fictitious.

How to test?

Obtain a download of all vendor names in Excel. Sort by name and visually compare any vendors with similar names. Investigate any near-matches.

3. Check for fictitious vendors.

Why test?

The accounts payable clerk may add a fictitious vendor (one in which no similar vendor name exists, as we saw in the preceding example).

The fictitious vendor address? You guessed it: the clerk’s home address (or P.O. Box).

Pay particular attention to new vendors that provide services (e.g., consulting) rather than physical products (e.g., inventory). Physical products leave audit trails; services, less so.

How to test?

Obtain a download in Excel of new vendors and their addresses for a period of time (e.g., month or quarter). Google the businesses to check for validity; if necessary, call the vendor. Or ask someone familiar with vendors to review the list (preferably someone without vendor set-up capabilities).

4. Compare vendor and payroll addresses.

Why test?

Those with vendor-setup ability can create fictitious vendors associated with their own home address. If you compare all addresses in the vendor file with addresses in the payroll file, you may find a match. (Careful – sometimes the match is legitimate, such as travel checks being processed through accounts payable.) Investigate any suspicious matches.

How to test?

Obtain a download in Excel of (1) vendor names and addresses and (2) payroll names and addresses. Merge the two files; sort the addresses and visually inspect for matches.

5. Scan all checks for proper signatures and payees.

Why test?

Fraudsters will forge signatures or complete checks with improper payees such as themselves.

How to test?

Pick a period of time (e.g., two months), obtain the related bank statements, and scan the checks for appropriate signatures and payees. Also consider scanning endorsements.

Your Ideas

Those are a few of my ideas. Please share yours.

My fraud book provides more insights into why fraud occurs, how to detect it, and–most importantly–how to prevent it. Check it out.

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4 thoughts on “Five Disbursement Fraud Audit Tests

  1. These five fraud audit tests are a most. One test that I like to perform is related to the last payroll payment(s) of terminated employees, in places that have high turnover of employees, such as temporary employment, etc. Compare the check signature on the last payroll check against signature in the personnel file and earlier issued checks. Also, be alert of a check double endorsement, it is a red flag.
    As to the “The Little Book of Local Government Fraud Prevention” I already bought mine, ebook version so I can easily take it with me to the field. I disagree with the title of the book. The only thing “little” about the book is the title. Based on the usefulness of the book, it should have been entitled “Big” instead of “Little”. I can say it is a great manual.

  2. I particularly like the test for vendor and payroll banking information. Most fraudsters use their own data to embezzle funds and it is best to have a periodic review and control over these data including former employees data. Thank you for this useful info for those of us in the business of safe guarding assets of organization which intended to do good work. Cheers Sam