Which of the following best describes the misdirection of payments on accounts receivable to an employee's bank account?

Question breakdown

Tests

Classify fraud schemes by how they relate to accounting records

Difficulty

Medium

Key idea: Off-book fraud diverts assets before they are recorded or outside the recorded flow, so the stolen funds never show up in the organization's books.

How to reach the answer

1. Fraud is often classed as on the books (open or hidden) or off the books.
2. When a customer payment goes straight to an employee's bank account, the cash never enters the organization's records.
3. Because the theft happens outside the accounting system, it is off the books, much like skimming.
4. Detection depends on external evidence such as customer confirmations or complaints, not on reviewing the ledger.

Each option

• AIncorrect. Open on-book fraud leaves recorded but unconcealed transactions in the records, which is not the case when cash is diverted before it is recorded.
• BIncorrect. Hidden on-book fraud hides fraudulent entries inside the records, but here the receipt is never recorded at all.
• CCorrect. Diverted receivable payments go around the organization's records completely, which makes this off-book fraud.
• DIncorrect. 'Fraud on the balance sheet' is not a standard category of fraud scheme.

Common trap: Because receivables are recorded, candidates may think the scheme is hidden on the books, but the stolen cash itself never enters the accounting records.

In practice: Auditors detect diverted receipts through positive customer confirmations, aging analysis of growing receivables, and reconciliation of bank lockbox deposits.

Remember: If stolen funds never enter the organization's records, the scheme is off-book fraud and is best found through external evidence.

Reviewed by Alexandra Stone.